ABSTRACT Title of Dissertation: AN ESSAY ON THE POLITICAL ECONOMY OF INDUSTRIAL POLICY IN ETHIOPIA Eyob Tekalign Tolina, Doctor of Philosophy, 2019 Dissertation Directed by: Professor David A. Crocker and Professor I. M. Destler, SPP. In this dissertation, I present a political economy analysis of the post-1991 industrial policy (IP) in Ethiopia. In Chapter one, I set the context for the study and present the research methodology. In the second chapter, I present a comprehensive overview of the literature. After introducing key concepts and reviewing old and new debates on IP, I justify why a political economy framework is a promising way to analyze industrial policy. In Chapter three, I present the historical and current political and economic profile of Ethiopia. I emphasize Khan’s (2005) notion of a “political settlement” as a way of understanding the political economy of a nation in relation to its industrial policy outcomes. I also employ as a main analytic lens Whitfield et al.’s (2015) framework for the politics of industrial policy in Africa. This lens offers three conditions – mutual interest, pockets of efficiency and learning for productivity – as necessary for successful implementation of industrial policy. The Whitefield framework argues that the emergence of these three conditions is shaped by the type of clientelist (donor/client) political organizations that exist in a nation. As such, the model places strong emphasis on material incentives and constraints. In Chapters four and five, I test the relevance of this model to explain and evaluate Ethiopia’s IP. The analysis therein is divided into three politically significant time periods. The focus is to investigate the relations between the dominant clientelist political organization in each time period and the existence or absence of the three Whitfield conditions. The study shows that the Whitfield model neither adequately explains IP results nor guides Ethiopia toward better results. In a bid to establish a more credible and complete version of political economy, the study builds on and supplements the Whitfield model by defending an additional condition necessary for IP success, namely, the political and moral power of concerned citizens. Such an alternative approach I develop in Chapter six, which highlights the importance of such notions as fairness and equity, citizen rights, participatory institutions and civil society in the theory and practice of moral economy. AN ESSAY ON THE POLITICAL ECONOMY OF INDUSTRIAL POLICY IN ETHIOPIA By Eyob Tekalign Tolina Dissertation submitted to the Faculty of the Graduate School of the University of Maryland, College Park, in partial fulfillment of the requirements for the degree of Doctor of Philosophy 2019 Advisory Committee: Dr. David A. Crocker, Co-chair Dr. I. M. Destler, Co-chair Dr. Kenneth Leonard Dr. John McCauley Dr. Robert L. Sprinkle © Copyright by Eyob Tekalign Tolina 2019 Dedication To My Family ii Acknowledgments Words cannot express enough my gratitude to my adviser and dissertation co-chair, Professor David A. Crocker. David Crocker has been a source of constant inspiration. Had it not been for his continuous support and guidance, this dissertation would not have been completed. He knew how to nudge me and keep me going when I got distracted with immense professional responsibilities, including with my current role in the Ethiopian government. David Crocker has been a mentor and a father figure. Thank you very much, Dr. Crocker. I owe you a lot. I would also like to thank Professors I. M. (Mac) Destler (co-chair), Ken Leonard, John McCauley, and Rob Sprinkle for agreeing to serve as members of my dissertation committee and for their valuable time and feedback. Special thanks also go to David Falk, for his continued interest on my work and for his valuable support. I am especially grateful that my friends Dr. Nebyou Dagne, Mamo Miheretu and Sewasew, who continuously pushed me to work on my dissertation. Sewasew’s nudging and encouragement has been an exceptional source of inspiration. I want you to know that I cherish the memory of the timetables we shared and the conversions we had over the last couple of years. I would also like to thank a number of friends and colleagues, including, Zachari Tai, Robel Chiappini, Messay Tadesse, Brook Taye and Dennis Matanda for spending their valuable time to poof read part of the dissertation. Dennis Matanda deserves special thanks for taking the lion’s share of the proofreading. I would also like to thank my dad and my brothers and sisters for their support and encouragement over the years. Thank you to all my respondents for taking time to share your frustration and optimism about the political and economic developments in Ethiopia. This dissertation has hugely benefited from your wonderful insights and concerns. iii Finally, a very special and deeply personal thanks to my amazing family: my wife Tsehay Tiruwha (Tsilu) and my three kids Katie, Abkame, and Mohanne. Tsiluye, I know my Ph.D. work combined with my hectic work schedule has taken a huge toll on you. My limited availability over the weekends has not only diminished our time together as a family but increased your parental responsibilities. Thank you so much for bearing with me. I love you all very much. iv Table of Contents 1. CHAPTER I ………………………………....………………………….………..1 1.1.Background and Motivation ………………………………………………….1 1.2. Research Questions and Assumptions………………………………………..9 1.3. Organization of the Paper………………………………………………...…11 1.4.Research Methods…………………………………………………………....15 2. LITERATURE REVIEW: KEY CONCEPTS, DEBATES, and PERSPETIVES on INDUSTRIAL POLICY………………………………………………….…..22 2.1. Definitions………………………………………………………………...…22 2.2. The Industrial Policy Debate………………………………………………..36 2.3. Political Economy Perspectives…………………………………………..…41 2.4.The Notion of the Developmental State and the Experience of East Asian Countries……………………………………………………………………..44 2.5. The Relationship Between Democracy and Development: What Do We Know So Far?..................................................................................................49 3. CASE STUDY BACKGROUND………………………………………………..56 3.1.Evolution of Political Settlement in Ethiopia………………………………..57 3.2.Post-1991 Political Settlement…………………………………………….....64 3.3.Ideological Underpinnings: Revolutionary Democracy and Developmental State…………………………………………………………………………..67 3.4.Post 19991 Industrial Policy: Genesis, Content and Policy Instruments…….71 4. A POLITICAL ECONOMY ANALYSIS OF ETHIOPIA's POST-1991 INDUSTRIAL POLICY………………………………………………………....78 4.1.Period of Vulnerability (1991-1994)………………………………………...79 4.2.Period of Domination (1995-2012)…………………………………………..85 4.3.The POST 2012 Period: Period of Vulnerability and Contestation………...103 5. STATE BUSINESSRELATIONS……………………………………………...110 5.1.Formative Years………………………………………………………….....111 5.2.The Nature of State Business Relations…………………………………….112 5.3.Industrial Policy Outcomes 1995-2012………………………………….…118 5.4.The Ethiopian Public Private Consultative Forum (EPPCF)………………135 6. TOWARDS AN ALTERNTIVE POLITICAL ECONOMY FRAMEWORK...146 APPENDIX……………………………………………….…………………….161 REFERENCES……………………………………………………………........163 v CHAPTER I 1.1. Background and Motivation The debate over how best to promote sustainable and equitable economic growth is as old as economic policy itself. The crux of the debate centers around the fundamental question of how countries industrialize, or as put by Chinese and former World Bank economist Justin Lin (2010), how countries undergo a productivity- enhancing structural change. Such primary change is arguably a prerequisite for the kind of resilient economic growth that leads to sustainable improvement in the wellbeing of the citizens of a country (Stiglitz, 2012). Government indeed has a responsibility to support this type of structural improvement, but to what degree and how remains open for discussion. Industrial policy (“IP”) refers to the implicit and explicit regulations, interpretations, and policy stances adopted by a government to enhance within sector and between sector productivity (Naudê, 2010, p.4). When implemented properly, IP has the potential positively to affect the fundamental and structural characteristics of a national economy. There is a great deal of debate on IP or the actual and ideal role of government in the economy.1 Proponents of IP argue that due to significant market imperfections, externalities, issues of increasing returns, and so forth, the government is well positioned 1 We will return to definitional issues in the next chapter. It is important to clarify at the outset that the term IP is used in this study to refer broadly to the role of the state in the economy and not to any single or specific sector. In other contexts, the “industrial sector,” refers to manufacturing and other related activities, such as construction. Any specific reference to the industrial sector will be noted explicitly. 1 to provide information, externality compensation, and can help overcome coordination problems in the process of industrialization. This, in turn, would enable a developing economy to advance toward high-income status. (Lin, 2010; Naudé, 2010; Robinson 2009). Those arguing against IP, on the other hand, focus on the government’s lack of information and capability to select and promote the sectors that may have what Lin describes as a “latent comparative advantage” (Lin, 2012, p.6). Opponents of IP also raise practical issues ranging from the lack of strong econometric evidence supporting IP to the abundance of anecdotal evidence that industrial policies in Sub Saharan Africa (“SSA”) in the 20th century have in fact failed (Aghion, 2009; Harrison and Rodriguez- Clare, 2009; Hodler, 2009; Lall, 2004). Irrespective of the merits on either side of the debate, most countries have advocated for, proposed, and adopted IP in one form or another. Many SSA countries have taken practical steps in recent decades to develop and implement IP in a renewed effort to “catch-up” with the rest of the world. Influencing this effort are the examples of the East Asian countries in the 1970's (often referred to as “developmental states”) and, more recently, China. The Developmental State (“DS”) is a term frequently used to describe a nation that deems macroeconomic development as its core “mission” (Mkandawire, 2010). See the literature review section below for more details. In light of these developments, the debate on the role of the state in the economy has now taken a “new shape,” “ending the almost three decades of ideological grandstanding” (Chang, 2013, p.213). The new debate is not whether governments should or should not play an active role, but rather what type of IP is best and how should it be 2 designed and implemented (Rodrik, 2007, 2009; Chang, 2013). Recent works by Rodrik (2004, 2007), Evans (1995), Robinson (2009), Lin (2012), and Lin and Chang (2009) are transforming the debate to a much more pragmatic discussion by offering alternative approaches to variations in IP structures, processes, and results. In this context, political-economic factors are cited as important – and often neglected – contributors to success and failure of IPs in different countries. The principal argument is that the objectives and inner workings of the institutions implementing industrial policies help explain the success and failure of IPs and that these institutions, in turn, are shaped by the nature of the “surrounding” political system. A political economy (“PE”) lens thus becomes a useful framework for analysis as “industrial policy – promoting industry – requires an understanding of the political equilibrium of a society, of the actors and their interests, the political institutions, of de facto and de jure power and how these pieces all fit together” (Robinson, 2009, pp. 26-27), and, one must add, should fit together. At this juncture, it is important to clarify the outlines of political-economic analysis, as I am using the term and approach. What is political economy and how does it differ from an exclusively economic or an exclusively political analysis? Historically, political economy has been used to refer to a variety of intellectual and policy projects. The focus of political economy analysis is to reveal that the main difference between the success and failures of industrial policies lies in the nexus between each country's political and economic factors (Chang, 2013). The literature review in the next sub- section presents a comprehensive discussion of past political-economy policy projects. The political economy framework of analysis also provides an opportunity to 3 present what Robinson (2009) calls a positive theory of industrial policy, which can help explain why IP was adopted and has succeeded in countries like Taiwan while resulting in disastrous failure in countries like Ghana. Robinson recommends that research should aim to build such a specific positive theory because mere advocacy of generic industrial policy in the traditional sense – as a solution to emerging countries' problems – involves a tremendous leap of faith. Although there are a few matters of disagreement, to be detailed in due course, the current study is in basic agreement with Robinson et al.: different IPs differ with respect to their success or failure in generating equitable economic growth and these differences are importantly conditioned by a nation’s political economy. The study aims to bring fresh evidence in this regard by examining the political economy of industrial policy in Ethiopia. Over the last two decades, the Ethiopian government has been actively promoting a version of industrial policy (the details of which we will discuss shortly) with some level of success. Though little effort is made to analyze systematically the content and performance of this policy, the fact that the country has registered remarkable long-term economic growth – more than 10 percent per annum GDP growth over the last decade – has brought attention from various policymakers and scholars worldwide, creating a “buzz’” about the “Ethiopian Model.” For example, in its 2015 report, the World Bank applauds the "Ethiopian way" by showing how the country has managed to create its policy space to advance the national growth agenda. The Economist (2013) also observes that several individual African countries are making attempts to emulate the Ethiopian model. Ethiopia's experience, 4 some claim, presents a counterexample to the thesis that maintains that industrial policy is impossible in African states (Mkandawire, 2013 and Oqubay, 2015). Others, however, question the sustainability of the growth achieved and advocate for an opening of the political space to greater pluralism and citizen participation and increasing the role of the private sector. A review of the Ethiopian experience has the potential to spur further inquiry into what may be insufficiently recognized drivers and types of industrial policy. Additionally, we could establish critical determinants of the application of successful industrial policy. At the most basic level, while it may be obvious, it must be asked: how critical are political economy factors in economic success, and how are these relevant for Ethiopia's future? Finally, what useful lessons should one extrapolate from the Ethiopian experience for other SSA’s IPs? This study adopts a paradigm that combines empirical and historical analysis with theoretical argumentation employing a political-economy framework of analysis. It is useful to point out that such an approach helps improve on what Fine and Van Waeyenberg (2013, p. 17) call “econo mics’ fraught accommodation of reality as a result of its highly deductive approach.” This study employs as a main analytical lens Whitfield et al.’s (2015) framework for the politics of industrial policy in Africa.2 The key assumption of this framework is that the economic structure of developing countries creates a strong incentive for clientelist politics even though such politics do not entirely prevent development and 2 Unless otherwise specified, a reference to Whitfield et al. is to their 2015 work, in which they have introduced the framework as a holistic model. 5 effective implementation of industrial policies.3 The framework assumes that there are four different configurations of clientelist political organizations. Understanding the variations is important as the configurations of clientelist political organizations have significant implications for the emergence of three conditions that Whitfield et al. identify as necessary for successful implementation of industrial policy in Africa; namely, (a) mutual interest, (b) pockets of efficiency and (c) learning for productivity. We will explain, apply, and supplement these conditions in due course. The four different configurations of a clientelist political organization identified in the framework are: (a) the degree of vulnerability of the ruling elites, based on the distribution of power outside the ruling coalition; (b) the degree of contestation that the ruling elites face, based on the distribution of power within the Ruling Coalition; (c) the degree of political influence of capitalists relevant for the particular industry being promoted, based on their relative power vis-à-vis ruling elites, and (d) the degree of technological capabilities of capitalists relevant for the particular industry being promoted. The four configurations, Whitfield et al. argue, are in turn derived from two dimensions: (a) the relative power within and outside the Ruling Coalition and (b) the relative power of domestic capitalists vis-à-vis ruling elites and the technological capabilities of those capitalists (Whitfield et al., 2015). This study presents the political economy analysis of the post-1991 industrial policy experience in Ethiopia. The focus of the analysis will be on exploring whether the 3 Clientelist politics refers to an asymmetric relationship between groups of political actors that are involved in quid-pro-quo exchange of goods and services for political support. Clientelism entails a set of mutually beneficial actions between a less powerful client and a more powerful patron. 6 three necessary conditions for successful industrial policy identified in Whitfield et al.'s framework have in fact emerged and how their emergence, or otherwise, has affected the industrial policy outcome in Ethiopia. To help explore the casual linkages between the three putatively necessary conditions and the variations in different configurations of clientelist politics, I differentiate three time periods (to be introduced in section 1.3). However, the study goes beyond the Whitfield framework and puts forward, an analysis as to why the necessary conditions failed to emerge and how they can be established in a more complete and credible version of political economy. To this end, the study attempts to expand Whitfield et al.’s framework by explaining and applying the notion of moral economy, which I borrow from Samuel Bowles’s recent study, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens (2016). By demonstrating the limits of incentives and constraints, the study shows that a political-economic analysis based on mere configurations of a clientelist political organization is insufficient to explain the variations in IP outcomes. This essay also makes a normative argument for the inclusion of nonclientelist organizations or groups in addition to clientelist organizations and highlights the importance of the notions of fairness and equity, citizen rights, civil society and institutions, among others. The study suggests the need to include the relative political and moral power of concerned citizens as a third dimension in addition to the two dimensions Whitfield et al. identify; namely, (a) the relative power within and outside the ruling coalition and (b) the relative power of domestic capitalists vis-à-vis ruling elites and the technological capabilities of those capitalists. The study describes the historical and current political settlement in Ethiopia 7 before embarking on the analysis of country’s recent industrial policy experience. This approach is in line with – but goes beyond – Whitfield et al.’s argument that disaggregating clientelism and understanding its drivers and impacts is critical to understanding the variations in clientelist politics across different countries. Such disaggregation requires a deep understanding of the existing social order in a country. In this regard, the study draws on Khan (1995), who employs the concept of a “political settlement” to describe such a social order. The concept of “political settlement” is a useful tool to understand the rationale behind the actions of the ruling elite and its relations to non-elite individuals and groups. Going a step further than merely describing the historical and current political settlement in Ethiopia, the study provides a tentative suggestion on how to configure a credible version of the country’s political economy. It does so by employing a third dimension - the relative political and moral power of concerned citizens. A lasting political settlement requires a combination of power and institutions that are both politically and economically compatible and sustainable (Khan, 2010). This approach makes the analysis comprehensive and broad, supporting the adoption of a robust political economy framework of analysis. The political economy framework is used for this study because it is reasonable to believe that the economic process in Ethiopia is grounded in, and shaped by, the context of social, political and cultural factors. Moreover, it can and should be shaped by normative factors – moral economy -- that promote equity, citizen voice, and inclusivity. These factors should be taken into account to understand, assess, and improve Ethiopian economics. The working of the economy can neither be understood nor properly evaluated without due consideration of the social, ethical and political dimensions, as the “material, the social 8 and the political are not separate aspects of the way a society organizes its economic life” (Chandhoke, 1994, p.23). As Joseph Stiglitz points out, it is not enough to get the economics right; one must also get but the political economy right (Stiglitz, 2007) – and, we would add, get the moral economy right. 1.2. Research Questions and Assumptions How do political-economic (PE) factors affect the development and implementation of industrial policy? What are these factors and how important are they in Ethiopia's experience? To what extent, if any, has Ethiopia’s IP in turn affected these PE factors? How should countries like Ethiopia conceive and execute an IP in the context of a credible version of political economy? These are the general questions I would like to ask in this dissertation with hopes of contributing to the Ethiopian and broader industrial policy debate. Ideally, this overall study should address the following – more specific -- questions: 1. How do political economy factors affect the development and implementation of industrial policy in Ethiopia? 2. What kinds of clientelist political organizations have emerged in Ethiopia? Have any non-clientelist organizations emerged? What are the implications if they have arisen? 3. Have the key necessary conditions for successful conception and implementation of industrial policy -- mutual interest, pockets of efficiency and learning for productivity -- emerged in Ethiopia's industrial policy experience? If yes, how so? If not, why not? 4. What does the industrial policy process look like in Ethiopia? How are priority 9 sectors and IP instruments identified? How inclusive and deliberative is the process? 5. What have been, and are currently, Ethiopia's IP instruments and how productive and beneficial have they been? Have pockets of efficiency been created? 6. How should the incentives of the politically powerful be aligned with those of society in Ethiopia? Are material, non-moral incentives sufficient? What does it take to establish a sustainable political formation? Are good citizens with voice and power morally necessary as well as effective incentives? 7. What lessons can be drawn about IPs in SSA from Ethiopia's experience? How should countries like Ethiopia conceive and execute IP in the context of an ideal political economy, including both the ethical dimensions of citizen participation (dignity, fairness and trust) as well as economic self-interest? In the effort to address the seven questions, I assume the following presuppositions: The current political economy in Ethiopia has led to significant sectoral variations – some negative – in industrial outcomes. Political-economic factors are vital determinists for the successful promotion of IP. The state's ability to develop and execute successful IP is not only dependent on prevailing clientelist political organization. Non-clientelist organizations and processes have a role as well. - The political conditions under which Ethiopia implemented industrial policy did not allow for the development of intense mutual interest between the ruling elites and the private sector. A new version of IP based on the notion of strategic collaboration between the state and the business is required. Absence of strategic collaboration has limited political elites in what they learned with respect to good 10 governance and the role of good citizens in public deliberation and decision- making. The ability of the private sector to learn to be productive is also limited. - Ethiopia's experience shows that political-economic factors are primary determinists for the successful promotion of IP in SSA countries indicating the need for conceiving and executing IP in the context of a credible version of political economy. 1.3. Organization of the Paper Given the motivation for this study, its presuppositions, and its general and specific questions, the dissertation is divided into six chapters. The first chapter sets the context and explains the motivation for the study. The chapter also presents the research methods. Chapter two presents a comprehensive overview of the literature on industrial policy and the developmental state; it reviews old and new debates on the subject. I also define key concepts in this chapter. Chapter three presents the background for the Ethiopian case study – a succinct summary of Ethiopia’s socio-economic and political profile. The chapter then presents a detailed analysis of the political settlement in the country in two subsections, covering both pre- and post-1991 periods. The rationale is that (a) understanding Ethiopia's social order will play a central role in disaggregating clientelism, its drivers, and impact, and well as non-clientalist groups and (b) discourse on the political economy of development is inadequate if divorced from broader aspects of societal transformation (Stiglitz, 2012). The chapter also provides of overview of Ethiopia’s post-1991 industrial policy. Chapter four begins by providing the ideological underpinnings of the industrial policy and then moves on to discuss the industrial policy process, its contents and policy instruments 11 Because reconstruction of administrative apparatus is a path-dependent political process (Evans, 1995), Chapter three is also an analysis of Ethiopia's historical legacy; touching upon state formation, the definition of Ethiopian identity, and the new ethnic federal structure in Ethiopia. Such analysis arguably provides a strong basis to make a normative argument for the need to form a sustainable political formation. The remainder of the paper presents the political economy analysis of Ethiopia’s IP. Chapter four and five present a political economy analysis of Ethiopia's industrial policy experience based on Whitfield et al.'s framework for the politics of industrial policy. The analysis in these two chapters is framed in terms of the four configurations introduced above – the dominant clientelist political organizations -- and segmented into three politically significant time periods. These time periods are (a) the Period of Vulnerability (1991-1994); (b) the Period of Domination (1995-2012); and (c) the Period of Vulnerability and Contestation (2013 - present).4 A principal characteristic of the analysis in chapter four and five is to test the relevance of the Whitfield model in Ethiopia's case by investigating the correlation between the dominant clientelist political organization in each period, the existence or absence of the three necessary conditions for successful implementation of industrial policy, and the results thereof. Two of the three necessary conditions – (a) mutual interest and (b) pockets of efficiency will be discussed in Chapter four, which elaborates on the 4Adopted from (Bekele et al. 2016). Bekele et al. also identify the political order of the post-1991 period in four phases: regime transition (1991 - 1997), consolidation (1998 - 2005), domination (2005 - 2011), and contestation (2012 - present). 12 elusive national quest for mutual interest and pockets of efficiency in post-1991 Ethiopia. Chapter four evaluates why the two necessary conditions failed to emerge even under the “appropriate” configuration of the clientelist political organizations. With regard to pockets of efficiency, the chapter presents and evaluates the repeated effort by the Ethiopian government to reform its civil service. The chapter discusses why repeated reform efforts have failed to materialize and suggests a need for a drastically different approach. In relation to the Whitfieldian condition of “learning for productivity,” Chapter five focuses on Ethiopian state-business relations based on the "new" understanding of IP as a strategic collaboration between the private sector and the government – a collaboration involving a “dialogue” process. As Rodrick (2004) argues, industrial policy is as much about eliciting information from the private sector on significant externalities and their remedies as it is about implementing appropriate state policies. This approach is an effort to meet the criticism of IP that the state does not have sufficient information or the capability to “pick winners.” The chapter also presents and evaluates the political process through which the country (a) identifies sectors in which it has latent comparative advantages and then (b) develops and implements industrial policy instruments to develop those sectors. With the interaction between the private sector and the government playing a pivotal role in this chapter, I examine the genesis, evolution, and performance of the Ethiopian Public Private Consultative Forum (EPPCF), in this chapter. Crocker’s (2008, 2010, 2012, 2013, and forthcoming) five dimensions of democracy were utilized to evaluate the effectiveness and normative character of the EPPCF platform – its structure, processes, and results. These dimensions are breadth, depth, range, separation of powers, 13 and control. Chapter six, the last chapter, provides a synthesis of the key findings from earlier chapters and provides recommendations for an effective and defensible industrial policy. The chapter outlines a roadmap for effective industrial policy by making certain political- economic factors central to efforts aimed at stimulating structural transformation and development. The study demonstrates the insufficiency of relying exclusively on incentives and constraints: a political-economic analysis based on mere configurations of a clientelist political organization does not adequately explain variations in IP results or guide better results. There is ample space for one to make a normative argument for the inclusion of non-clientelist organizations or non-clientelist factions within clientelist infrastructure. Employing Bowles’s notion of a moral economy, these arguments highlight the importance of notions of fairness and equity, citizen rights, civil society, and institutions, amongst others. In this regard, the study critiques and improves upon the Whitfieldian model and suggests the need to include the explanatory and normative notion of the political and moral power of concerned citizens. People should exercise their agency; individuals and communities should run their own lives and be in the driver's seat of their affairs (Crocker, 2013, forthcoming). The implication is that such citizen roles would serve the state even better by giving it moral and political legitimacy (Pettit, 2014). The final chapter also addresses the issue of an institutional network and examines how to ensure optimal levels of economic and political inclusiveness. 14 1.4 Research Methods Why A Case Study Approach? This study's objectives are to understand: (a) how political-economic factors affected Ethiopia’s industrial policy, (b) how political-economic factors should affect its industrial policy, (c) how political-economic factors were affected by Ethiopia’s industrial policy, (d) how important these factors were (and are) to Ethiopia’s collective experience, and lastly (f) how these factors might be optimized for Ethiopia’s future. To this end, not only does one need to look at the process of developing industrial policy, its content, the type of policy instruments in use, and the process of implementation. One also must examine the underlying political economy factors that affect the development and implementation of industrial policy. The political economy factors, in turn, are dependent on many factors including the type of political settlement, the relative power distribution within the ruling elite vis-à-vis the rest of the society, including the private sector and other contenders for political power. To understand and analyze such a complex set of interactions, a case study method using a qualitative approach is preferable (George and Bennett, 2005). Ragin et al. (2004) describe qualitative research as something that involves in-depth, case-oriented study of a relatively small number of cases or a single-case by seeking detailed knowledge, with the goal of finding out "how" and “why” things happen (or happened) and making the facts understandable. Capturing the political, social, and cultural elements that underpin the policy-making and implementation process in the country requires employing qualitative data that helps explore new spheres of knowledge that are not necessarily accessible through a quantitative approach. Thus, the questions posed in this 15 study cannot be answered satisfactorily with “a large-N Methodology,” but require “qualitative methods and an in-depth knowledge of country specific realities’ (Whitfield et al., 2015). As George and Bennett (2005) argue, case studies offer a better opportunity to undertake a detailed consideration of contextual factors with a good grasp of historical processes and causal factors. Why Ethiopia? Ethiopia's selection for the case study makes sense for many reasons. First, the Ethiopian government has been actively pursuing industrial policy for more than two decades and is often considered a role model in and for Africa. Second, the Ethiopian experience presents an interesting paradox. On the one hand, the country has registered remarkable success measured in terms of GDP growth. The growth, however, has not translated into a meaningful shift in the structure of the economy. The sustainability and fairness of the growth achieved is questionable given the complex political and ethical challenges the country is experiencing. The case study can thus arguably contribute to our understanding of the critical drivers of successful industrial policy with sustainable and just results and provide useful insight into the nexus between the political and the economic. Pragmatic reasons also dictate the selection of Ethiopia for the case study. Some scholars argue that some doctoral and post-graduate studies do not reach their expected conclusion because of a limited access to information and a paucity of technical or financial resources. The researcher’s background and current position enable him to overcome these limitations and have been useful for the successful conclusion of this study. The researcher is Ethiopian, has worked at different levels of both public and 16 private sector institutions in Ethiopia, and, thus, has privileged access to data and data sources. Since the summer of 2018, he has been a cabinet member of the Ethiopian government and is currently Ethiopian State Minister of Finance. What Are Relevant Data Sources? As noted above, potential data sources for case study research include documentation, archival records, surveys, interviews, physical artifacts, direct observations, and participant-observation (Yin, 2002; Baxter and Jack, 2008). This study primarily uses the survey approach and has employed the structured interview. Content analysis is employed to analyze Ethiopia's main policy documents. Direct observation is another technique the researcher employed. As Yin (2002) notes, the use of multiple data sources is a hallmark of a case study research. Using multiple data sources enhances data credibility as it offers a chance for triangulation of findings. By triangulating data sources, the study gives reason to believe that the phenomena are viewed and explored from multiple perspectives (Knafl and Breitmayer, 1989). Interviews: Because much of this research focuses on understanding the industrial policy- making and implementation process and the prevailing political economy and its impact, interviewing is one of the critical methods used in this research. • This study identified respondents by theoretic sampling (Warren and Karner 2010). Here, the researcher was guided by and sought in respondents the criteria specified by the research question only. • Additionally, to gain further insight into the policy-making process, the political economy issues that affect the development and implementation of policies, and 17 critical factors determining success, individuals or institutions that had been a part of the policy-making and implementation process were identified as key respondents. • Respondents that fulfilled these criteria included key government officials, political leaders, including senior members of the Ruling Party (the Ethiopian Peoples' Revolutionary Front-EPRDF), members of the opposition, technical experts, sectoral associations and chambers of commerce, and owners and managers of selected firms. • Initial respondents that fulfilled the theoretic sampling criteria were identified based on the researcher's knowledge of the respondent's role and based on their public profile. For the rest of the respondents, the respondents were selected carefully – based on the “snowball” survey approach and suggestions made by the initial interviewees. Final respondents were selected using judgment sampling and convenience sampling.5 In this study a total of 37 respondents were interviewed; they collectively covered various aspects of the research question. • The respondents were divided in to groups. Dividing respondents into groups aided in the triangulation of research findings (See Appendix I for the profile of the respondents)6 5 Judgment sampling and convince sampling are non-probability sampling methods. “Judgment sampling” is based on the degree of knowledge that respondents are likely to have. “Convenience sampling” occurs when the researcher selects respondents who are endorsed or available. Though this approach may consume more time and reduce the statistical representativeness, it is nonetheless critically useful in this kind of study when looking at complex interrelated issues that are also context dependent. 6 As the respondents spoke with condition of unanimity (given the state’s repressive nature when the interviews were made), their names are not specifically mentioned. However, I have provided a full description of their positions and interview dates. 18 Document Analysis: To supplement survey and interview data, the study undertook a thorough review and analysis of relevant documents. This exercise can increase the validity of the findings (Yin, 2002). The documents analyzed include policy documents, proclamations, government directives and guidelines, government policy statements, statistical abstracts, circulars, technical reports, national development plans, performance reports and other published materials related to industrial policy. The document analysis helped uncover information regarding such things as the Ruling Party’s ideological underpinnings, the policy-making process, the content of the industrial policy, the type of instruments used and manners of implementation, performance results and an indication of challenges encountered. Policy documents (internal party documents in particular) also serve as useful indicators of government intentions. The document analysis enriched and enhanced results obtained through other methods. It also helped to triangulate upon findings from other methods (Tashakkori and Teddlie, 2003). Direct Observations: The last method used was direct observation. Here the focus was mainly on my own understanding the policy-making process, the level and manner of interaction between the private sector and the government, the operation of the government bureaucracy, the organization of private sector associations and capacity issues at central government institutions. The following table summarizes the major types of data required to undertake the analysis and the likely sources of that data. As can be seen in the table below, effort is made to get multiple perspectives on a given issue. Type of Data/ Information Likely Source(s) Key policy instruments Document analysis / interviews / direct 19 observation The policy-making process, interest group Document analysis / interviews / direct politics, key influencers, policy bargain observation and its outcomes Results of policy instruments Interviews / document analysis Type and quality of existing Interview / document analysis / direct institutionalized and semi-institutionalized observation mechanisms for policy dialogue between the private sector and the government Perceptions of key stakeholders on the Interview / direct observation industrial policy-making process, its relevance, and impact The current political equilibrium in the Document analysis including academic country, key political, economic studies of these issues / interviews / direct considerations in the design and observation. implementation of industrial policy The planning process, monitoring, and Document analysis / interviews / direct evaluation of plans observation Capacity of the government to develop Interviews / direct observation and implement industrial policies 20 Capacity of the private sector to influence Interviews / direct observation / document policy choices and their implementation, analysis especially the role of dialogue and deliberation in contrast to lobbying, threats, propaganda Ideas about the path that Ethiopia should Interviews / direct observation / academic take in the future and efforts to articulate studies on types of political economy in and implement a better (fairer, more theory and practice, including those with inclusive, more participative) political an implicit or explicit normative economy dimension. 21 CHAPTER II LITERATURE REVIEW: KEY CONCEPTS, DEBATES, and PERSPETIVES on INDUSTRIAL POLICY 2.1. Definitions Industrial Policy: Despite its widespread usage, it is not easy to define the term industrial policy (IP). Part of the ambiguity arises from its broader and more specific applications. IP can be broadly defined as referring to all economic policies that governments pursue or more narrowerly referring to specific tools related to specific economic activities. In the case of the former, Naudé provides a useful definition describing industrial policy – whether or not the policy deals with “industries” – as "the process whereby governments aim to affect the structural characteristics of their economies deliberately." (Naudé, 2010, p.) Donges (1980) offers a less general definition. For him, IP “embraces all government actions which affect industry” (Donges (1980, p. 189, my italics). Chang (1994) argues that the term industrial policy should not be used as a catchall term encompassing every economic policy. He contends that such broader definitions might overload the concept, rendering it meaningless. For him, industrial policy is focuses at particular industries “… to achieve the outcomes that are perceived by the state to be efficient for the economy as a whole" (Chang, 1994, p. 60). Reich (1982) takes a similar approach relating IPs to governmental actions targeted at supporting industries that have export and job-creation potential. Landesmann (1992) and Lindbeck (1981) also emphasize the selectivity in industrial policy highlighting that it 22 should be designed to be specific, directed towards particular industries, firms, regions, and groups in the labor market, among others. Recent definitions have emphasized the process aspect of industrial policy. For instance, Hausmann and Rodrik (2003) describe IP as a strategic collaboration between the private sector and the government involving a “dialogue” process (also see Rodrik, 2004). As Peres and Primi (2009) argue, industrial policies can also be forward-looking. Using the notion of frontier policies, they argue that industrial policies can be used to create new capabilities in science and technology based on pre-defined political developmental visions. Economic Growth vs Economic Development: The terms economic growth and economic development are often used interchangeably, implying more broadly a change to a better way of life. It is important to highlight their differences, however, as they have different analytical connotations. In a strict analytical sense, economic development is not the same as economic growth, as the latter is a narrower concept. Economic growth refers to an increase over time in a country`s real output of goods and services as often measured using Gross Domestic Product (GDP) or Gross National Income (GNP) or the per capita versions (respectively GDP per capita or GNP Per Capita). Economic development (or development), on the other hand, is a broader concept. It measures an upward movement of the entire social system regarding income, savings, and investment along with progressive changes in the socioeconomic structure of a country and its consequences for human well-being or quality of life. Economic development is described as a multidimensional process involving the reorganization and reorientation of an entire economic and social system, as opposed to purely 23 an economic phenomenon. Economic development measures an increase in living standards, improvement in self-esteem, and freedom from oppression as well as an expanding choice (Todaro and Smith, 2015). Economic development is thus measured more qualitatively using concepts such as the United Nations Development Program’s Human Development Index (HDI), gender-related index (GDI), Human poverty index (HPI), infant mortality, and literacy. Economic development also has an implicit normative aspect (and sometimes explicit normative or ethical aspect) as it applies to people's sense of morality relating to right and wrong or good and evil. Amartya Sen (1999) articulates this normative notion powerfully linking it to the moral significance of individual well-being and capability to exercise one’s own agency. His view of development includes political freedom and freedom of opportunity, in addition to freedom from the yoke of abject poverty. Moreover, economic growth, unlike economic development, usually does not focus on sustainability issues as it does not take into account the depletion of natural resources that might lead to pollution, congestion and disease (See also Crocker, 2008). Sen identifies two different perspectives of development and argues that the gap between the two perspectives is a major issue in theory and practice of development. Under what Sen calls the narrower view of development that focuses on GNP growth or industrialization it is often asked whether certain political or social freedoms (such as the liberty of political participation and dissent or opportunities to receive basic education) are or are not “conducive to development.” Under the more foundational view of development, described by Sen as “development as freedom,” however, substantive freedoms such as the liberty of political participation or the opportunity to receive basic education or heath are viewed as constitutive components of development rather than mere ancillaries or by-products. 24 Sen identifies five distinct types of substantive freedoms: political freedoms, economic facilities, social opportunities, transparency guarantees and protective security. The promotion of these distinct but interrelated instrumental freedoms, Sen argues, helps to foster valuable human capabilities or substantive freedoms. As opposed to the narrower view of development that questions the conduciveness of promotion of freedom for economic growth, the foundational view of development argues for a strong interrelationship between the different types of freedoms. For instance, political freedoms (in the form of free speech and elections), Sen argues, would help promote economic security. Similarly, freedom in terms of social opportunities (such as education and health facilities) facilitates meaningful economic participation of citizens. Also, the generation of personal abundance as well as public resources for social facilities is ensured when freedom of economic facilities (in the form of opportunities for participation in trade and production) is ensured. For Sen, then, development should be seen as a process of expanding the real freedoms that all people can enjoy: “Development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or over activity of repressive states” (1999, p. 3). Structural Transformation: According to Ocampo et al. (2009), economic transformation occurs when the structure of the economy is altered due to a movement of resources from low to high productivity sectors.7 7 The transformation may take a form of economic, political, or social changes. In this paper, we sometimes are narrowly focus on economic transformation through industrial policy even though political dimensions and other forms of transformation are equally important. 25 In its standard conception, such reallocation of resources follows a pattern of moving from traditional agriculture to modern agriculture, industry, and services. The implied notion is that such a shift of resources has benefits in terms of better employment, increased productivity, and other spillovers to the economy, resulting in higher economic prosperity and human well-being. Thus, it is this process of productivity-enhancing structural change that helps countries industrialize or develop (Lin, 2012). Opinions vary on the direction of causality between structural transformation and economic development. For some, economic transformation is embedded within the concept of economic development (Ocampo et al., 2009). For others (such as De Vries et al., 2013), structural transformation is the driver of economic development. There are others who view structural transformation both as a cause and effect of economic development (Syrquin, 2006). Kim (1979) also traces a simultaneous process between economic growth and transformation. He argues that the process of structural change happens alongside economic growth; the two processes, in turn, combine to produce the process of economic development. For this study, we do not take an argued stand on the causal issue but assume that there is a correlation between economic development and structural transformation, which in turn is a result of government intervention focused on productivity-enhancing structural changes through industrial policies. There is also an emerging debate on which economic sectors are the key drivers of structural transformation. As mentioned previously, the common conception was that the pattern of movement in structural transformation involves a reallocation of resources from the agricultural to manufacturing sector and then eventually to the services sector. As such, the focus of industrial policy has mostly been on manufacturing and related activities. For Wade (2009), for instance, industrial policy should mainly focus on the 26 manufacturing sector, as there is substantial evidence to support the notion that the manufacturing sector – at least in many contexts – is a unique engine of growth. He argues that there is a direct positive correlation between the rate of GDP growth and the degree to which the manufacturing sector grows. Several structural economists underline the strong correlation between GDP growth and the manufacturing sector (Tregenna, 2008; Thirlwall, 2002; Ocampo et al., 2009; Rodrik, 2011). Some scholars argue that the share of manufacturing export and manufacturing value add to total GDP and, hence, contend it is a key indicator of a successful structural transformation of an economy. An increase in the share of manufacturing exports as a percentage of total merchandised exports is often another key indicator of a shift in the structural characteristics of an economy. An increase in the share of manufacturing export indicates the diversification of the economic base. Manufactured exports from less developed economies generally tend to be dominated by primary products. An increased share of manufacturing products as a percentage of total merchandize exports is a key indicator that the manufacturing base of the economy is expanding alongside its global competitiveness (Lall, 2000; Oqubay, 2015). Others, however, challenge the strong emphasis placed on the manufacturing sector. Whitefield et al. (2015), for instance, highlight the need to rethink what economic transformation means in the twenty-first century. She and her colleagues argue that the divide between agriculture and manufacturing has been transcended as the process of commodification and de- commodification has become more dynamic.8 Whitefield et al. also identify technological, 8 These scholars attribute the de-commodification process to the rising prices of agricultural commodities (owing to increased demand from China). The commodification of manufacturing goods, on the other hand, is attributed to the falling prices of manufactured goods, again due to Chinese oversupply of labor-intensive manufacturing products. 27 organizational, and marketing innovations as new sources of structural transformation. Irrespective of the sector, they argue that the higher profits generated due to the innovations, would help stimulate the process of structural transformation. Similarly, Rodrick (2004) also contends that industrial policy sometimes does and should more importantly focus on restructuring policies in favor of dynamic activities, irrespective of their sectoral location. Such a shift in thinking about structural transformation broadens the possible sources of transformation and the focus of industrial policy as economic transformation is now conceptualized as a “macro-level phenomenon, driven by several separate but interacting and interconnected processes; agricultural transformation, export diversification, building technological capabilities among firms and farms, industrial deepening, and industrial upgrading” (Whitefield et al., 2015, p. 58). Comparative Advantage and Industrial Policy: Another important debate in industrial policy discourse relates to the notion of comparative advantage, an economic term used to refer to an economy’s ability to produce goods and services at a lower opportunity cost compared to others goods and services. The debate focuses on whether an industrial policy should be “comparative-advantage-conforming” or “comparative-advantage-defying” and the extent to which the country can and should deviate from its comparative advantage. Lin and Chang (Lin and Chang, 2009), in particular, had an extended debate on the issue. In his New Structural Economic (NSE) Framework, Justin Lin maintains that countries can achieve industrial upgrading and structural transformation by selectively developing industries in which they have a comparative advantage, which in turn is determined by the endowment structure of the country under consideration (Lin, 2012). For Lin, then, the state's role in 28 providing hard and soft infrastructure to jump the process of structural transformation should be consistent with the country's existing or what he calls “latent” comparative advantage. Industrial upgrading should thus proceed step by step in conjunction with changes in a country's comparative advantage, as learning costs are lower in this manner than if a country attempts a big leap from their current structures (Lin, 2012). Chang takes issue with Lin's notion that a country should conform to its comparative advantage. He argues that given the slow process of factor accumulation and technological capability building "it is simply not possible for a backward economy to accumulate capabilities in new industries without defying comparative advantage and entering the industry before it has the ‘right' factor endowments" (Lin and Chang, 2009, p. 491). Industrial policy, for Chang, should be ‘comparative-advantage-defying' allowing a country to take a big leap in critical sectors rather than climbing the development ladder stepping on each rung in concurrence with changes in its actual comparative advantage.9 Both Lin and Change cite the historical experience of newly industrialized countries to defend their respective positions. Lin interprets their experience as comparative advantage confirming while Chang contends that the experiences were all comparative advantage defying. Rodrik tends to agree with Chang on this point. Recounting the experiences of Japan, Korea and, recently, China, Rodrik maintains that these countries may have developed by defying their comparative advantage rather than focusing on sectors that are consistent with each country’s current comparative advantage (Rodrik, 2011, P.228). 9 The two scholars also differ on their view of how far the country can deviate from its comparative advantage. While they both agree that deviating too much from one's comparative advantages is to be avoided, Lin believes that there should be little deviation. Using Chang's metaphor of a development ladder, Lin argues that skipping some rungs in climbing the ladder should be quite minimal. 29 Interest Groups, Clientelism, Rents and Rent Seeking: Interest Groups: The term interest group (also referred to as special interest group or pressure group) is used to describe any association of individuals or organizations, usually formally organized, that attempts to influence public policy for the realization of the group’s vested or self-interest. James Madison used the concept of a “faction” to describe the risk of harmful interest group activity. In Federalist10, Madison defined faction as “...a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community” (Madison, 1787, par.2). Non-orthodox economist Mancur Olson (1982) also saw a risk of diminished innovation and adaptation to change because some interest groups create barriers to entry. Besides, Olson argued, due to the costly nature of group decision-making, interest groups might limit the ability of the economy to respond to shocks quickly. Societies with interest groups are thus expected to be less flexible and less innovative and therefore grow more slowly than others, even if interest group activity does not increase over time. In other words, as long as group formation is incomplete and entails transaction costs, groups are predicted to exert what Coates et al. (2011) call a sclerotic effect on growth, manifested through both diminished capital stock growth and diminished productivity growth. However, this does not mean that all interest groups advance interests averse to the larger society. Interest groups can also advocate for a policy that serves a broader public purpose. For example, groups may advocate for the common good, justice, peace, inclusiveness, and collective agency. Groups that advocate for better protection of human rights or protection of the 30 environment can be examples of interest groups that promote broader public interest as the policies and positions they advocate do not exclusively benefit just a segment of society. Such groups thus clearly do not fall under Madison's definition of a ‘faction,’ as Kalinowski (1993) notes. Interests groups function in all kinds of political and economic systems -- be it in advanced economies or less developing economies, mature democracies or authoritarian and totalitarian regimes. In fact, as Olson (1982) demonstrated in his seminal work, the prospect for the accumulation of special interest groups is higher in stable societies where there is more freedom to organize as compared to less stable societies. Olson's key finding that there is a negative correlation between the number of interest groups and the size of economic income and growth has largely influenced the prevailing negative perception of interest groups. As interest groups generally – or, at least, often -- advocate for policies or positions that exclusively benefit particular groups or a segment of a society, the policies they advocate might result in a net social loss. In Olson's terminology, resource allocation becomes increasingly inefficient as time passes, resulting in decreased growth. A significant number of empirical works that attempted to test Olson's hypothesis have proved that groups accumulate more in stable, free environments (Coates et al., 2007). The validity of Olson's hypothesis, however, concerns formally organized associations that seek to influence policy. As interest groups could be both formal and informal, the results may differ when informal groups that are more prevalent in less stable environments are taken into account. Olson’s hypothesis that interest group activity reduces capital accumulation as well as innovation, and thus exerts a "sclerotic," or harmful effect has also spurred a large body of 31 empirical work. Though a clear consensus has not emerged, some studies have found that there is a negative relationship between interest group activity and productivity growth, consistent with Olson’s hypothesis (See, for instance, Heckelman, 2000; Choi, 1983; Whitely, 1983; Weede 1986 and Coates et al., 2011.) Other studies have revealed, on the other hand, little evidence of sclerosis (See for instance Knack and Keefer, 1997; and Knack, 2003). Going beyond testing the Olson hypothesis, other studies have examined the workings of interest groups in different contexts. McCallum and Blais (1987), for instance, find that there are indeed cases when a welfare state may retard economic growth by reducing the incentives to work, save, move, and change. However, in situations where special interest groups have acquired significant power to block positive change, the welfare state may play a growth- enhancing role and reduce the incentives to block change by offering assistance to those who are negatively affected by the change. Another study finds a positive role that profit-maximizing media may play in representative democracies when such media minimizes the chances of excessive influence or capture by special interest groups. In media’s efforts to reach large audiences, media firms transform real events and issues – including public policy issues – into entertaining stories, thereby facilitating opportunities to inform voters better and making elected representatives more sensitive to the interests of their constituencies (Dyck et al., 2013). Clientalism: As mentioned earlier, the Whitefield (2015) framework is based on the strong assumption that the economic structure of developing countries creates a strong incentive for clientelist politics. Recall that we accepted the Whitfieldian definition of clientalism as mutually beneficial but unequal power between patron and client. The imperative to maintain political power through clientelism, is a common feature of all countries. Such clientelist politics, Whitefield et al. argue, do not necessarily prevent the development and effective implementation of industrial policies. Rather, Whitefield et al. argue that variations in patron-client relations and 32 client groups may lead to different industrial policy outcomes, depending on whether or not they are conducive for the emergence of the three conditions – mutual interest, pockets of efficiency, and social learning – that Whitefield et al. argue are necessary for successful implementation of industrial policy in Africa. Rent and Rent-Seeking: The concept of rent is central in industrial policy discussion and indeed in much contemporary economics, but it is not the same as the everyday notion of paying rent for an apartment. As a deliberate government effort focused on transforming the structure of the economy, the industrial policy practice of rent involves targeted support to specific industries, with the objective of achieving outcomes, that are perceived by the state, to be efficient for the economy as a whole. What this means, in effect, is that the state needs to channel resources to selected industries deemed productive, and discriminate against sectors deemed unproductive. Economists use the term “rent” to describe resources the state has at its disposal and thereafter, deploys them to fulfill its industrial policy objectives. Simply put, rent is “excess income”, which exists in inefficient markets.10 Excess income is additional income paid to a factor of production more than what is required to keep that factor in its current use. As Khan (2000, p.1) writes, “a person gets rent if he or she earns an income higher than the minimum that person would have accepted, the minimum being usually defined as the income in his or her next-best opportunity.” 11 Buchanan (1980), developed an ideological 10 In a theoretically-perfect competitive market, rent does not exist. 11 Compare Khan’s definition with that of Wikipedia on “rent seeking:” “In public choice theory and in economics, rent-seeking involves seeking to increase one's share of existing wealth without creating new wealth. Rent-seeking results in reduced economic efficiency through poor allocation of resources, reduced actual wealth- creation, lost government revenue, increased income inequality, and (potentially) national decline.” (accessed January 4, 2019) Khan (2000) identifies seven different types of rents based on the structure of rights that sustain them. The first one is classical economic surplus. This rent is sustained by the property right of the capitalist over capital equipment and of the landlords over land. The second one is monopoly rent which emanates from individual 33 free market perspective, describing rent as an uncompensated transfer, that signifies the waste of resources involved in such transfer. The term ’rent-seeking' is thus used by libertarian economists like Buchanan to describe such wasteful transfers. It can be understood as a practice of seeking excess income or uncompensated transfers. As Ricketts (1987) observes, however, there is yet no full agreement about how the term rent seeking can and should be interpreted, and he suggests a number of various possibilities. The concept of rent-seeking can be used to describe some unethical or unjust activities such as theft, fraud, and employee slack in the workplace. The term can also be applied, however, to less problematic activities such as political lobbying for monopoly privileges, tariff restrictions, subsidies or even aid. But even these activities could be ethically controversial in certain contexts. Rent seeking can also be confused with entrepreneurs’ profit maximization efforts, say, by innovating or by engaging in competitive trade practice, as these might potentially involve a diversion of resources from one agent to another. Ricketts attempts to resolve the puzzle by bringing in a normative notion of social waste and gain. He argues that the process of competition in the right institutional circumstances results in net social gains as opposed to the examples mentioned in the preceding paragraphs that involve net social losses (Ricketts, 1987). Thus, as Buchanan (1980) suggests, the term rent-seeking is designed to describe behavior in institutional settings where individual efforts to maximize value generate social waste rather than rights over lumpy assets or legal rights to be sole supplier in the markets. The third one is a natural resource rent, the source of which is the exclusive right to the natural resource. The fourth one, Schumpeterian rents, comes from a right over the intellectual property. Rents based on transfers, the fifth one has its basis on transfers of rights through the political mechanism and rent for learning, the sixth one is conditional on learning. Finally, rents for mentoring are based on rights over residual earning. Despite the general perception that rents are all inefficient, Khan argues that rents could be efficient or inefficient, depending on the circumstance. 34 the social surplus. Rent and rent-seeking are central to the heart of industrial policy discussions. At issue is the practice of channeling rent income – fiscal support – to selected sectors and groups the state deems productive, at the expense of sectors the state deems – at least in the short run – unproductive. That is why in the industrial policy debate, the question of whether government intervention in the economy results in socially wasteful rent-seeking activities, or whether state intervention can result in net-social gain through the productive management of rents, is critical. While opponents of industrial policy argue that state intervention invariably leads to wasteful rent-seeking activities, proponents claim that rents can have the potential to be growth enhancing if channeled into productive activities. The success of an industrial policy thus depends on how productively the government has deployed rent resources. As Whitfield et al.. (2015) note, managing rents is central to industrial policy. In the same vein, managing development, in fact, may require the continuous deliberation and differentiation of efficient vs. inefficient rents by policy-makers and analysts (Khan, 2000). The concept of rent and rent management is a critical issue in industrial policy discourse. The answer to the key question of why some forms of rent-seeking activity enhances productivity while others do not, in effect assists in analyzing effective vs. ineffective IPs. It also assists in understanding what political conditions made some countries successful in implementing industrial policy and how aspiring economies can succeed in the same manner. However, in spite of the fact that the economic structure of developing countries creates a strong incentive for clientelist politics, the development and effective implementation of fair and inclusive industrial policies is still a possibility. Thus, the critical focus should be in understanding the variations in clientelist politics across different countries and the possibility of 35 democratic non-clientelist groups, which in turn requires understanding the key drivers and impact of clientelism and understanding its drivers. However, the focus on clientelism – although necessary -- is not sufficient because moral incentives are important as well. To summarize, this section has introduced the concept of industrial policy and highlighting the notion of structural transformation in industrial policy discourse. In addition, because rent and rent-seeking are central in industrial policy discussions, the section also clarified the concepts of rent and rent seeking and the related concepts of of interest groups and clientelisim. We have argued that interest groups do prevail in all kinds of political and economic systems, including the more advanced and democratic economies. The key debate is whether the governments can productively manage “rents” using industrial polices. Section 2.2. below presents the summary of the decades old debate on this issue. The next section, 2.3, presents a political-economic perspective in which political-economic factors – especially the asymmetric power relations between the state and client and non-client groups --- explain the variations in successes and failures of IPs. 2.2. The Industrial Policy Debate Few phrases draw as strong a reaction as does “industrial policy” (IP) among economists and policymakers (Pack and Saggi, 2006, p.1). This is evidenced by a great deal of debate on IP that goes at least as far back as the 17th century (Serra, 2011). Serra made one of the earlier cases for industrial policy in Naples when he analyzed economic backwardness and dependence on other economies. Serra was, perhaps, the first development economist to analyze the general features of economic backwardness by looking at issues such as lack of manufacturers, entrepreneurship, and good trade policy (Perrotta, 2013). Serra made the case for industrial policy by linking poverty to the absence of stable governments that encourage export, 36 investments and overall trade. In an effort to understand the critical role of the state in rapid industrialization in continental Europe, List (1909) popularized the theory of ‘infant industries’ and how the state protected and promoted infant industries. During that period, economic development was perceived to be state-led dirigisme (List, 1909; Gerschenkron, 1962). Modern-day IP proponents deem the state’s role critical in improving industrialization. However, based on various market imperfections, externalities, issues of increasing returns, among other things, proponents argue, the government, through industrial policy, can and should provide information and external compensation to help overcome coordination problems in the process of industrial upgrading. Essentially, the predominant focus of economic theory research in the 1970’s was geared towards finding different cases in which markets failed and highlighting the implications of imperfect information for markets (Greenwald & Stiglitz, 1986; Besley, 2017). Invariably, IP opponents and critics focus on the government’s lack of information and capacity to select and promote sectors that have potential to succeed or the government’s ability to “pick winners,” as Robert Wade (2009, p. 354) put is. The notion of picking winners – the government’s ability to identify and support sectors that have a potential of success – is critical in IP debate. As we will discuss shortly in section 2.4, successful IP experience of East Asian counties is often described in terms of a government’s ability to pick winners. Objections to IP are most reasonable when they arise from the fear that governmental “rents” are most commonly used to protect vested or minority interests, rather than to achieve national development (Johnson, 1999). It is reasonable to argue that resistance to an IP – namely, policies designed to promote specific industries – is premised on the presupposition that any such policies are generally wasteful and could have a distortive effect on the market. Critics, 37 therefore. invariably claim that there is always government inadequacy in picking winners. In the same vein, IP opponents claim that state intervention in the economy is socially wasteful and that intervention helps create, increase or protect the monopoly position of a particular group, leading to socially wasteful rent-seeking activities. Rent seeking activities can also arise from direct government activities or distortions induced by particular groups (Karnik, 1993). Although some have argued that IP in some Latin American countries had a modicum of success between 1950 and 1970 (Peres and Primi, 2009), mainstream critics of the government’s employment of IPs do raise plausible arguments about practical matters. These arguments claim the lack of strong econometric evidence supporting IPs and submit evidence of failed experiments and experiences in 20th century sub-Saharan Africa and Latin America (Collier and Venables, 2007; Jalilian, Tribe, and Weiss, 2000; Killick, 1978; Lall and Wangwe, 2004; Pack, 1993; and Robinson, 2009). Owing to what is, ostensibly, a significant number of failures, and negative assessments and influence of the World Bank Group, structural adjustment programs (SAPs) were prioritized over IPs in the 1980’s and 1990’s – with the role of the market and private sector marginalizing the public sector, and ultimately, the theory and practice of IPs. Importantly, in an era referred to as the “rise of market fundamentalism,” the argument shifted against industrial policy. That era lent credence to the dismissal of any proactive attempt by government to foster structural transformation and attributed economic success only to free market features like liberalization, privatization and deregulation (Stiglitz, Lin and Monga, September 2013). Nonetheless, starting in the early 1990’s, the pendulum on IP debate began to swing back to the IP proponents’ camp (Naude, 2010, p.11). Alhough several factors contributed to this rise, one critical factor was the failure of the structural adjustment programs of the “Washington Consensus” to induce meaningful economic transformation in sub-Saharan Africa (Aghion, 2009; Bar-On, 1997). 38 The success stories emerging from Asia, ranging from Japan’s re-industrialization to the East Asian “miracles” and the rise of China (Weiss, 2005), also gave resurgence to pro-IP thinking. More recently, the 2008 financial crisis reinforced the pro-IP position, specifically the need for a pro-active governmental approach and a more selective industrial policy (Naudé, 2010). Finally, policymakers increasingly recognized that national and global policy objectives, such as those encapsulated by industrial policy and, such policies as equal opportunities for all citizens, pollution control, and climate control, are not necessarily reflected in market prices. Moreover, with success in China and Brazil – countries that do not follow the Washington Consensus – the overall framework is that thinking about macroeconomic strategy, including industrial policy, is unavoidable (Stiglitz, Lin, and Monga, September 2013). These debates notwithstanding, proponents of IP claim that, in practice, almost all countries do and should adopt an IP in one form or another. From the industrial revolution in the United Kingdom in the eighteenth century to the industrialization of the European countries, USA, and Japan in the nineteenth century, proponents argue that there is ample evidence showing most advanced economies have adopted and continue to utilize some type of industrial policy. For example, Lin (2012) argues that leveraging tariff barriers to protect infant industries was key to earlier success and transformation of overall industry and GDP in Europe. Perez and Primi (2009) also observe that countries around the globe have implemented – perhaps motivated by the East Asia miracle – some form of IP. Due to cases of successful government-led economic growth, the debate of industrial policy is back on the agenda at both the theoretical and practical levels. At a conceptual level, the failure of countries, such as Ghana and Argentina that strictly followed the Washington Consensus directives with respect to technological upgrading, economic growth, and poverty reduction has led to much questioning of the supremacy of pure market fundamentalism. The 39 2008 global financial crisis has also emboldened those defending the role of the state. Even those who argue that neoliberalism theories remain unchallenged admit that there is a renewal of interest in Keynesianism (Fine, 2013). In recent years, even among opponents of the industrial policy, there is more tolerance for some governmental role in industrialization and in promoting macroeconomic stability, education, guaranteed property rights, and legal enforcement of contracts (Haque, 2007). At a practical level and as noted above, strong inspiration has been drawn from the experience of Japan, the “Asian Tigers” of Korea and Taiwan and most recently the emergence of China. With countries, such as Germany, the United States and some Scandinavian countries, it seems, as Chang (2013) notes, that the approximately 30-year period within which IP was shelved is coming to an end. IP is taking on a new shape and there are a plethora of alternatives currently on offer, and the contest is not whether governments should or should not have industrial policies but rather what sort of IP would be best and how should IPs be designed and implemented (Rodrik, 2004, 2007 and 2009; Chang, 2013; Evans, 1995; Robinson, 2009; Lin , 2012; Lin and Chang, 2009, and Whitfield et al., 2015). Typical arguments today start from the premise that although IP can be a potentially powerful tool, there is no “one size fits all” approach on how it can succeed (Rodrik, 2007, 2009). Ideally, successful IP depends on the extent to which the policy is tailored to the specific context or institutions of a country. One could even argue that a country’s successful IP depends on identifying a nation’s specific binding constraints and opportunities (Hausmann, Hwang, & Rodrik, 2007). Such considerations have informed my own Ethiopian case study IP is now commonly described as a strategic collaboration between the private sector and the government, a collaboration that importantly involve a “dialogue” process. This 40 understanding defuses the criticism by the opponents of IP that the state does not have the information and the capability to “pick winners.” Through collaboration, IP allows firms and the government to learn from each other and together about underlying costs and opportunities. Both the private sector and the government have imperfect information but the imperfections in one create a useful role for the other. (Hausmann & Rodrik 2003; Rodrik, 2004). Rodrik describes this model of strategic collaboration and coordination between the private sector and the government as embeddedness (Rodrik, 2003). 2.3. Political Economy Perspectives Political economists, as we adumbrated in Chapter one, cite political factors as critical factors in the various successes and failures of IPs. Notable works in this regard include Robinson (2009); Wade (1990), Evans (1995), and Change (1994, 2013). At this juncture, a political economy framework emerges as a promising way to analyze industrial policy. Promoting industry requires an understanding of the political history and current equilibrium of a society, the actors and their interests, the political institutions, de facto and de jure power and how these pieces all fit together (Robinson, 2009). As foreshadowed above, the political-economic framework historically has been used to refer to a variety of intellectual and policy projects. For classical economists, including Adam Smith, the term political economy was synonymous with economics – that is, economics essentially had a political dimension (Sen, 2009). Classical political economists also understood political economy as both a science and art. As a science, political economy was viewed as a discovery of truths concerning the ways a nation may be made rich. As an art, it was viewed as a body of rules for running a successful economy, akin to prescriptions for good housekeeping. Such an exercise proves the point that political economy, if not economics itself, is incurably 41 normative (Sen, 1988). In the post-WWII period, with the advent of social and public choice theory, political- economic analysis was systematized and integrated with mainstream economics. Public choice theory, also referred to as the new political economy, is eclectic. It borrows ideas and develops themes from many predecessors but also seeks to improve on earlier approaches. This framework analyzes, among other things, interest group politics, institutions, and interactions between economic and political actors. It is concerned with problems of information asymmetry, political resources, power distributions, and issues of fairness, accountability and corruption. The political economy framework also looks behind institutions that generate policy outcomes, giving scholars and others a way to think through the processes that would make government intervention more effective and fairer. After all, societal arrangements, including many institutions such as the state, the market, and political parties, should be investigated on how much their contribution enhances or guarantees, inhibits or undermines, substantive individual freedoms (Sen, 1999). Disaggregating clientelism and creating space for citizen agency and normative considerations requires understanding the existing social order and normative goals in a given society. One can and should leverage the concept of “political settlement” to describe the social order. A political settlement refers to a combination of power, norms, and institutions that are mutually compatible and sustainable, regarding economic and political viability (Khan 2010, p.4). When powerful groups have gained an acceptable distribution of benefits from an institutional structure, the combination of their power and the fair institutions become mutually compatible. The powerful groups prefer to maintain such a structure; hence, sustainability becomes possible. 42 As Khan (1995) points out, compatibility also has to be sustainable because institutions, both formal and informal, have to achieve the minimum levels of economic performance, fairness, and political stability required for the reproduction of particular societies. This is a political settlement, as the resultant social order is a result of a political compromise made between different groups. The political settlement is a useful tool to understand the rationale behind the actions of the ruling elite, but also a fair arrangement to which most citizens can consent and in which they can participate. It offers the opportunity contextually to understand how power is distributed in society and how the power structure affects policy making and implementation. Additionally, it challenges scholars, policy makers, and citizens to understand how power, and its structures, can and should be shaped in and through engaged and democratic citizenship. Therefore, understanding the political settlement is a good starting point in understanding the political economy of a nation and how it determines and shapes the outcome of an industrial policy. That is why we place a strong emphasis on understanding the evolving political settlement in Ethiopia as we examine in later chapters the political economy of its industrial policy. Before we begin to examine the political economy of IP in Ethiopia, however, we need to deal with two important issues. First, we need to describe the concept of “the developmental state” and review the experience of Asian countries. As we have argued earlier, the central issue in the IP debate is whether governments can successful promote specific industries without wasting resources and distorting the markets. The decades long and heated debate revolves around proponents’ claim and critics’ counter claim that governments can (and should) pick winners. The experience of East Asian countries has brought unique perspective to the IP debate; 43 hence the need to review this experience and introduce the notion of developmental state, which is closely associated with the experience of East Asian counties. In the discussion of the experience East Asian developmental states, the nexus between democracy and development is unavoidable. Since most of the successful developmental states did not have democratic governments when they underwent significant economic transformation, a question is often raised as to whether contemporary developmental states can and should be democratic. Thus, the second remaining issue we review is the relationship between democracy and development. 2.4. The Notion of the Developmental State and the Experience of East Asian Countries Credit for the term “developmental state” goes to Chalmers Johnson (1982). Johnson used the term to describe the phenomenal growth of the Japanese economy and rapid industrialization after the Second World War. The developmental state is a planned, rational state, able to stimulate, support and promote economic development. The uniqueness of Japanese industrial policy, according to Johnson, is not due to the intervention of the state in the economy per se (as all states intervene in the economy). Rather, the uniqueness comes from the predominance of “developmentalism” in such an intervention. The essence of the Japanese state, Johnson further argues, is defined by the dominance of development orientation, because the Japanese state has given its priority to economic development for more than 50 years. The developmental state literature has further developed based on the experiences of the East Asian “miracle” economies of South Korea, Taiwan, and Singapore. The developmental state experience, however, is not limited to East Asian countries. Chang (2010) identifies three different types of developmental states; the “classical’ 44 developmental states of the East Asian Economies, the Scandinavian model, and the United States model. The classical model is the one often advocated in the developmental state discourse, covering the experience of Japan (initially), Korea, Taiwan, and Singapore. There is an authoritarian element to all these examples, at least until recently. Chang argues that even France had used a similar economic development strategy as the East Asian economies during the same period. According to Chang, France’s national planning commission, its implementation of selective industrial policies, the role of elite bureaucrats, and the aggressive use of State Owned Enterprises compares favorably with the experience of the East Asian economies. Chang (2010) also provides evidence that Scandinavian states selected industrial policies, albeit less extensively, supported R&D, and used welfare labor policies to promote structural changes. Thus, the argument goes, the Scandinavian experience fits the developmental state description, especially when the developmental state is broadly defined to refer to any state that deliberately intervenes to promote development. Yet, in the Scandinavian case the state was avowedly democratic as well as developmental. The United States is the third type of developmental state in Chang’s trio. In fact, Chang considers the United States as a pioneer of the developmental state model. Alexander Hamilton argued for the protection of domestic industries, aka the infant industry argument, as early as 1791. In implementing Hamilton’s recommendations, the U.S. arguably has been – sometimes more, sometimes less -- one of the world’s most protectionist countries. The Trump Administration’s (“Mr. Tariff’s”) current shake-up of global trade is, perhaps, a testament to this protectionist undercurrent. In fact, one could trace developmental statist activity in post-WWII U.S. history. For 45 example, Chang points to the network of experts – variously situated in state agencies, universities, and other research institutes – who applied cutting edge technological research to commerce (Chang, 2010). Even during the US Civil War Abraham Lincoln established the Morrill Act, which became the basis for Land Grant universities and their service to agricultural and industrial workers. The more a cooperative network included local and regional participation and accountability, the more this model had a democratic component – a point we will return to as we evaluate, modify, and supplement the Whitefield political economy model. Of course, one may argue that Chang’s (2010) classification of developmental states is wanting, especially with regard to Ethiopia. Countries aspiring to develop – in some sense – may constitute an additional group in Chang's classification. This is particularly important as the notion of the developmental state is used to describe development designed to catch up with the prosperous “developed” world. At this juncture, although Chang (2010) provides a helpful definition for the developmental state, the term “developmental state” or “development state” can take on alternative meanings. Hence, the developmental state can be understood as any state that deliberately intervenes to promote development, however understood. It could also denote a state that achieves political legitimacy by stimulating economic development, which in turn is achieved mainly through a selective industrial policy (Chang, 2010; Johnson, 1999). Or, the concept of a development state, as it was in Ethiopia, could be informed by a development ideology that emphasizes institutional structure, autonomy, and social anchoring (Mkandawire, 2010). Ethiopia’s late Prime Minster, Meles Zenawi underscored the importance of shared norms and a structural dimension that focuses on the state’s capacity to implement effective policy (Zenawi, (unpublished). 46 With his notion of “embedded autonomy,” Peter Evans (1995) distinguishes development states from “predatory states.” For Evans, a developmental state ought to have an internal organization that closely resembles a Weberian bureaucracy characterized by a distinct sense of corporate coherence and governmental impartiality.12 This coherence gives the state apparatus a certain kind of self-sufficiency, enabling it to channel fairly the nation’s resources towards more productive uses in order to fulfill its overall developmental mission. In other words, the state can manage, lead and direct the development project without succumbing to the influence of exclusively self-regarding interest groups. According to Evans, however, such autonomy, should not be insulated from the society. Bureaucracies in developmental states are rather “embedded in a concrete set of social ties that binds the state to society and provides institutionalized channels for the continued negotiations and renegotiations of goals and policies” (Evans, 1995, p.12). Both East Asian Scholars, who have a favorable view of the state, and market fundamentalists, who view state intervention in the economy as invariably inefficient and suboptimal, have criticized the idea of a developmental state for its lack of conceptual clarity and empirical validity. Conceptually, for instance, the notion of embedded autonomy has been controversial. Critics argue that East Asian states did not have Weberian institutional coherence and governmental impartiality, for there was both intra-governmental fragmentation and a lack of the right kind of insulation from society (Whitefield et al., 2015). The industrial policy also has been criticized on its own terms as allegedly marred by 12 Weberian bureaucracy is named after the German sociologist Max Weber, who argued that an impersonal and incorruptible bureaucracy is the most efficient and rational way to organize human activity. But, Weber argues that bureaucracy should be merit-based – and not interest group-based – to control corruption and ensure the efficiency and effectiveness of the process. For this interpretation of Weber, see Mungiu-Pippidi (2015). 47 political battles, inefficiencies, policy failures and trials and errors, despite anecdotal success stories (Moon and Prasad, 1994). A good number of academic works has focused on whether the Asian experience is replicable in other developing countries. Although some scholars identify policy ideas from the East Asian experience as worth emulating by nations aspiring to “develop,” others point to the peculiarity of the East Asian experience and the way it makes policy imitation difficult. Questions also emerge as to whether developmental states can survive or succeed in the current global order as WTO rules have become increasingly stringent. The rise of international trading networks has also created new barriers for young firms to enter the world market. Pirie (2013), for instance, argues that structural changes in the global political economy have rendered the developmental state obsolete. Pirie argues that the increasing barriers to entry in primary industries, related to the growing dominance of multinational corporations, the costs of technology, and the closures of the policy space due to WTO agreements, all have made it impossible for developmental states to develop an independent industrial base (2013). Others, however, contend that despite the narrowing of policy space in recent decades, it is nevertheless not closed (Wade 2003; Chang, 2007; Hayashi, 2010). Lastly, probably the more important question is whether developmental states can and should be democratic. This question has become increasingly critical due to the increased attraction to the East Asian developmental state model. Such attraction creates some uneasiness, as many consider it a risky venture that may lead nascent democracies to revert to authoritarianism, forcing a “cruel” choice between democracy and development. The question though is whether such a choice is necessary, given that both democracy and development are important policy challenges. Does one precede or benefit from the other? Can and should they go 48 together? The following sub section focuses on this question. 2.5. The Relationship Between Democracy and Development: What Do We Know So Far? Often referred to as Modernization Theory, Seymour Martin Lipset’s (1959) work is probably the single most important work on democracy and development. His finding that “the more well-to-do a nation, the greater the chances that it will sustain democracy” (Lipset 1959, p. 75) is arguably the first work to establish the theoretical link between a given country’s level of development and its democratic governance. As Prezeworski et al. (2000, p.79) note, Lipset’s work may have generated “…the largest body of research on any topic in comparative politics. It has been supported and contested, revised and extended, buried and resuscitated.” The heated debate that Lipset’s seminal work sparked is by no means at an end. Broadly, it is possible to discern four different lines of thoughts. The first view, which might be described as a “development first” argument, points out the detrimental role of democracy on development. Proponents of this view argue that democracies lend themselves to popular demands for immediate consumption at the expense of long-term profitable investments. They also point out that democracies cannot be insulated from the interests of rent seekers, cannot mobilize resources swiftly, and are prone to conflicts and class struggles. Thus, dictatorships are thought to be better in forcing saving and launching economic development (Huntington and Domiguez, 1975; Huntington, 1968; and Rao, 1984). The second perspective maintains a more favorable view of democracy’s role in bringing about justifiable socio-economic outcomes. Some of the features of democracy that help promote growth include allocative efficiency; open, efficient and accountable governance; conducive institutional environment for market-led economic development; free-flowing information; and 49 security of property rights. Government responsiveness to the public's demands in areas such as education, justice, and health are also highlighted as additional positive features of democracy (Baum and Lake, 2003; Lake and Baum, 2001; Rodrik, 1998, 1999; North, 1990; and Halperin, Siegle, and Weinstein, 2010). Amartya Sen (1999) makes a strong case in this regard by distinguishing the instrumental, intrinsic, and constructive values of democracy. Sen describes an instrumental role of democracy as that of producing good consequences, for example “the political incentive that operates on governments and on the persons and groups that are in office” (1999, p.152). As they have to face the electorate for re-election, Sen argues that elected officials have the incentive to listen to what citizens want. Paulin Hountondji, Beninese philosopher and politician, reinforces Sen’s point about the instrumental role of political liberty as he underlines the “pricelessness of liberties,” such as the freedom of expression, not just for the sake of philosophizing, but also for “all real political and economic progress, too” (1983, p. 69). Robert Dahl (2000), the dean of democratic theorists, underscores the point when he argues that democracy fosters human development more thoroughly than any feasible alternative. By the constructive value and role of democracy, Sen refers to the democracy’s role in facilitating an effective exchange views and thereby generate informed and scrutinized choices and the formation of values and priorities. The third view on the relation of democracy and development is a firm denial that there is any relationship (positive or negative) between democracy and development. Przeworski et al. (2000), for instance, conclude that democratic transitions arise randomly. They maintain that the type of political regime in a given nation does not affect its socio-economic growth. They argue that when countries are poor, there is little governments can do to improve things. Helliwell 50 (1994) also arrives at similar conclusions. Przeworski et al. (2000) point out, however, that once democracies are established in any random way, their chance of survival increases the more affluent the nation is. In their own words, “democracies survive in affluent societies whatever may be happening to them. They are brittle in poor countries” (2000, p. 137). But as far as the path to democratization goes, Przeworski and his colleagues argue that countries may go through a development-first approach, pursuing an authoritarian path, a democracy first path, or may move gradually along the Lipset line, increasing in both democracy and development by degree. The following graph captures the three options more vividly. Figure 1: The Democracy/Development Space Democracy First Przeworski Zone Democracy Lipset Line Authoritarian transition GDP/capita Source: Goldstone and Kocornik-Mina, 2005: cited in Przeworski et al, 2000. To conclude, though a lot of ink has spilled debating the relations of democracy and development over the last decade, no definite conclusion has emerged. Such difficulty arguably arises, however, due to what Sen (1999) calls the narrower conception of development, which 51 focuses merely on GDP growth. On a more foundational view of development, which Sen conceives as “development as freedom,” however, substantive freedoms such as the liberty of political participation are viewed as constitutive components of development rather than a mere corollary, ancillary or accidents. From this perspective, it does not make sense to question the “conduciveness” of democracy to development, as both the process aspect and the opportunity aspect of freedom are equally critical to good development. For Sen, the process aspect of freedom refers to “processes of decision making,” such as voting and other kinds of “participation in political decisions and social choice” (1999, p. 291). This freedom is intrinsically valuable, for it is good in itself for individuals and communities to run their own lives rather than be coerced by others or the forces of circumstance. Development/development is intrinsically good if and when it enables individuals and communities to decide for themselves and determine their own lives. The “opportunity aspect” of freedom refers to “opportunities to achieve valued outcomes” (1999, p. 191). Development/democracy is instrumentally good when it results in opportunities that people have reason to value. For Sen, development, including democratic decision-making as an essential component, becomes meaningful when it frees people from both the process and opportunity aspects of unfreedoms (Sen, 1999, p.17). The critical importance of both democracy and development (as opposed to an either-or argument) is well articulated in the notion of a democratic developmental state that Robinson and White (1998) framed in the 1990’s. This notion views development and democracy agendas as mutually reinforcing, by retaining the autonomous institutional attributes of the developmental state and placing it in a democratic political context. As discussed earlier, the importance of an independent institutional structure is strongly 52 underlined in developmental state literature. A developmental state needs to have an internal organization that closely resembles a Weberian bureaucracy; namely, a distinct sense of institutional coherence for the common good. Such a state can manage, lead and direct the development project. For its effective functioning, the state needs to be embedded in a concrete set of social ties, as captured in Evans’s (1995) notion of embedded autonomy. Without permitting capture of the state by a self-interested group or individual, the social ties bind the state to society and provide institutionalized channels for the continued negotiations and renegotiations of goals and policies. In his more recent work, Evans (2008), expands the notion of embeddedness even further to include a "bottom-up" set of state-society ties, going beyond the state-business relations. The need for denser embeddedness, Evans argues, arises because of a change in the source of growth. As opposed to 20th-century growth, which was anchored in the expansion of machine production and a blue-collar middle class, growth has become bit-driven. Rather than investment in machinery and physical assets oriented to the production of tangible goods, prosperity now depends on generating assets such as ideas, skills, and networks. The state’s role, thus, should be focused on expanding investment in human capabilities (Evans, 2008). As the Ethiopian experience demonstrates, building a democratic developmental state is not an easy undertaking. Cognizant of the challenge, Robinson and White have cautioned that the democratic developmental state they have outlined may be a rare bird on the developmental scene. Despite the difficulty, what democratic developmental states offer is appealing. For a nation that strives to expand the capability of its people and enable them to live the kind of life they value, choosing between democracy and development is not a practical option. In summary, this chapter has introduced key concepts, debates and perspectives on 53 industrial policy. The chapter has introduced industrial policy as government’s targeted efforts to alter the fundamental and structural characteristics of a given economy, underscoring the centrality of the notion of structural transformation in industrial policy discourse. The chapter distinguished between economic growth and development and emphasized the latter’s broader meaning as a multidimensional process involving the reorganization and reorientation of an entire economic and social system. Drawing on Amartya Sen’s work Development as Freedom, the chapter has also presented two different perspectives on development. Sen views the narrower view of development, which focuses on GNP growth, as at best a means to overcome both “process” and “opportunity unfreedoms” and to secure various political and well-being capabilities. The chapter has also presented the review of the key debate on industrial policy; namely, the competing arguments for and against an IP. At the heart of the debate is the role of governments in developing and implementing structural improvements. In this connection, the chapter also reviewed the experiences of East Asian and especially discussed the relevance for Ethiopia of the concept of the developmental state. The chapter included, on the one hand, a consideration of the inconclusive debate concerning the empirical relations between democracy and development and, on the other hand, with Sen’s attractive effort to circumvent the debate with his agency and capabilities approach of “development as freedom.” A central theme of the chapter and one of particular importance for this dissertation has been the concept of political settlement (Kahn, 1995, 2010). A political settlement refers to a society’s combination of power, norms, and institutions. These societal features are that are more or less compatible and sustainable and provide the basis for the society’s economic and political viability. Understanding a society’s political settlement is a promising starting point for 54 understanding the political economy of a nation and its impact on IP outcomes. The following chapter focuses on Ethiopia’s evolving political settlement and the way it helps us understand and evaluate its political economy and industrial policy. 55 CHAPTER III CASE STUDY BACKGROUND This chapter presents a brief summary of the socio-economic and political profile of Ethiopia within the context of the country’s bid for transformation. The chapter presents Ethiopia’s profile from the perspective of the political settlement theory, which we introduced in the last chapter. Recall, Kahn defines a political settlement as a society’s combination of power and institutions (and one should add norms so that there is no suggestion that might makes right) that is mutually compatible and also sustainable in terms of economic and political viability (Khan, 1995). As is rife in societies such as Ethiopia, if powerful groups are not receiving an acceptable distribution of benefits from an institutional structure, they will strive to change it. Ideally, one would expect that any changes would be sustainable, for both formal and informal institutions are keen to achieve a modicum of economic performance under any specific political settlement (Khan, 2010). Political settlement as a concept, can be applied to interpreting a prevailing social order in a given society as a function of political compromises between powerful groups (and between more powerful and less powerful groups). These groups include the larger public and together these many groups interact and have the power to set policies in that society. The above definition also shows that there are limits to the types of institutions that can survive in particular contexts and that substantial differences in institutional performance are both to be expected and can be the subject of rigorous analysis. Moreover, one needs to note that political institutions, despite apparent similarity, perform very differently in different countries. This chapter is divided in two four sections. In 3.1, I present the evolution of Ethiopia’s political settlement covering the pre-1991 period. In 3.2, I discuss the ongoing political settlement challenges covering the post-1991 period. In the remaining two sections, I analyze 56 and provide an overview of the post-1991 period IP. Accordingly, section 3.3 introduces the ideological underpinnings of Ethiopia’s Developementalism while 3.4 discusses the genesis of Ethiopia’s post-1991 IP and describes its contents. 3.1. Evolution of Pre-1991Political Settlement in Ethiopia Historians trace Ethiopia’s history as an organized and independent polity to the first millennium BC (Fattovich, 2010). But the first State, for which tangible evidence exists, is the Kingdom of Aksum, in the northern part of the country.13 At the height of its reign, during the first century AD, the rulers of the kingdom may have controlled parts of present-day Sudan, Yemen, and Somaliland (Fattovic 2010). Modern Ethiopia emerged in the second half of the 19th century when successive emperors, beginning with Emperor Tewodros II, Yohannes IV, Menelik II and Haile Selassie I initiated and presided over the first stages of Ethiopian’s modernization. In their bid to expand the Ethiopian empire southward, from its base in the largely Amhara and Tigray Orthodox highlands, successive emperors engaged in bloody wars. Ethiopia’s history is full of internal conflict and instability for the most part of the 19th and the 20th century. These wars forcefully integrated the southern part of the country into what became current day Ethiopia. Scholars argue that the process of expansion has created a severe rift among the Ethiopian peoples. Those people in the southern part of the country felt culturally and socially dominated by the northerners (called Abyssinians). As a result, Ethiopia experienced a social division between northerners and those from the south and borderlands. The result was that the 13 Also known as the Kingdom of Axum or the Aksumite Empire 57 Ethiopian State rested on shaky grounds (Lyons, 2011; Hassan, 1994). With slight variations in tactics and approach, successive emperors employed a similar strategy to establish a political settlement. Emperors came to power following a protracted power struggle with their political rivals. The power struggles involved years of bloody wars, intricate diplomacy, redistribution of economic power to punish enemies and reward supporters, and a claim of legitimacy from the deity (Zwede, 2002). The political settlement theory argues that the economic structure of developing countries create strong incentives for clientelist politics.14 Ethiopia’s case is no exception. A review of the country’s modern history shows that clientelist politics was predominant across successive regimes, and the state in Ethiopia has been extractive in its very nature. For the successive imperial regimes, the economic basis of the political power was tribute payments and surplus labor, which were both extracted from the peasants (Zewde, 2002). As it controlled more and more land with the State’s territorial expansion to the south, the State increasingly became the space for a patron-client relationship. Loyalty to the Emperor paid off materially in terms of access to land. The State provided land grants to its officials and supporters. Especially during the last decades of the Emperor’s reign, the land grant policy reached its peak as the regime became increasingly desperate for political support in the face of mounting opposition. This policy resulted in the reduction of a substantial portion of the peasantry to the status of tenancy and created what Acemoglu and 14 As discussed in Chapter two, by clientelist politics, we are referring to an implicit or explicit asymmetrical quid- pro-quo relationship between two parties, identified as patron and client. Both groups benefit from the relationship, but – by definition – the more powerful group has the upper hand. 58 Robinson (2012) call extractive economic institutions. Contrary to Scott’s (1976) argument that there are phases in which relations between patrons and peasants were infused with principles of justice and reciprocity and non-exploitation, in Ethiopia’s case, the relationship has been mainly exploitative. Akin to Olson’s notion of “stationary bandits” (Olson, 1965), State power became a tool for self-enrichment and augmentation of power by the few at the expense of the larger society. Abbink attributes the entrenched political culture in the country to resource competition: “The state resembles a domain of personalized power and resource competition through the instrumentalization of vertical loyalties among special, strategic constituencies” (2006, p.19). Vaughan and Tronvoll also attribute the violent political culture to the long-standing predominance of the Ethiopian state in the control of material resources of all kinds (2003). Ethiopia’s last emperor, Haile Selassie I, managed to hold onto power for a relatively extended period (1930-1974) because he managed to consolidate state power and expand the reach of the ruling elite, culturally, politically, and economically. The Emperor managed to create a state bureaucracy, a strong and modern military, and a semblance of a parliamentary rule with an imperial constitution. As Zewde (2002) notes, the Emperor was very serious about strengthening the coercive arm of the state. The Emperor organized different armed agents, including the imperial bodyguard, the police and finally, the army. The government’s budgetary allocation demonstrates the priority accorded to the apparatus of coercion. In 1944-45, for instance, about 50 percent of the government budget went to the security apparatuses (Zewde 2002). Nonetheless, as Markakis (1987) notes, the Ethiopian state has been described as a classic example of an “ethnocratic state.” Under the imperial state, the distribution of power was based 59 “on an ethnic calculus that gave a near monopoly to the Amhara, or, rather, the Amharicised, ruling class” (Vaughn and Tronvoll, 2003, p. 82).15 In spite of Amharic favoritism, the Emperor attempted to achieve a political settlement by cleverly working with elites from other ethnic groups, providing them with some access to power and economic privileges. Because the Amharicised class controlled state power more than members of the Amhara ethnic group, Ethiopia’s Amhara peasantry belonged to the dominant group in cultural and psychological terms only. The Amhara peasantry had no share of power or economic privilege. Invariably, because access to state power controls access to economic privilege and social status, the imperial regime practiced a crude form of cultural and political suppression that sought to weaken and control, if not erase, the identity of all subordinate ethnic groups in its domain (Vaughn and Tronvoll, 2003). Even though the Amharicised class was the dominant force during the regime of the last emperor, as discussed before, the north-south divide better describes the long political history of Ethiopia. Except for parts of the 18th century, when the Oromo Yejju dynasty ruled much of the Ethiopia Empire, the Amhara and the Tigrayan elites have interchangeably controlled state power in Ethiopia. The core institutional and political arrangements, which defined the political settlement the last emperor established, began to unravel over time as the level of peasant and ethnic dissent and conflict grew. Tareke (1996) documents an impressive list of peasant uprisings against the exploitative feudal system in the country over many decades. The regime managed to extend its political life for some time but only by forcefully suppressing the riots. 15 The term “Amharaicized class” refers to people who speak the Amharic language and are part of the political and economic elite class, even though they are not necessarily from the Amhara ethnic group. 60 The political settlement during the Imperial period also was unable to achieve sufficient economic performance to avoid economic crisis. The Emperor’s centrally administered development planning efforts were mostly unsuccessful. In addition to several smaller scale development plans earlier, since the mid-1950’s the Emperor’s regime implemented three successive National Development Plans. Ofcansky and Berry (1991) attribute the failure mainly to the lack of officials’ administrative and technical capabilities and the absence of proper organizational structures necessary to facilitate such large-scale economic development planning. Asefa (2001) argues that the political power concentration during the Imperial era resulted in institutional failure that blocked successful reform and transition. Although there were individuals with leadership talent, Asefa argues, they could not emerge due to the Emperor’s resistance to devolve power and decision-making. The emperor waited too long – until he became old and senile – to introduce needed institutional reforms. Khan (2010) notes some political settlements can tolerate substantial economic hardship and poverty without collapsing while others are more sensitive to economic performance. Ethiopia exhibited a tendency of tolerance for some time. However, as the level of ethnic exploitation and the economic hardship of the masses became unbearable, the core institutional and political arrangements that define the political settlement began to unravel. Decades of covert and overt opposition to the regime, including a failed coup d’état, finally resulted in a revolution that brought the feudal regime to an end. Overall, the political settlement achieved by the imperial regimes was unsustainable as it was founded on an explosive conjunction of antagonistic class and ethnic divisions. A political settlement can only be viable if there is a minimum level of economic and political viability, including fairness and inclusiveness, to keep the institutional structure together. During the third quarter of the 20th century, Ethiopia witnessed violent conflicts in which 61 subordinate groups challenged the Imperial regime. Opposition to the regime had many facets: peasants rebelled against the government by increasing demands in exchange for their produce; nationalities took up arms to demand self-determination; intellectuals struggled for their vision of a just and equitable world (Zwede, 2002). Inspired by communist ideals of the day, Ethiopian students and intellectuals from all walks of life opposed the regime and demanded an end to the political, ethnic, and economic exploitation that characterized the nation. With their “land to the tiller” motto, the students gave color to decades-old questions of the poor peasant. Initially, a source of suppression and used by the regime against ethnic and regional rebellions, the army itself finally rebelled against the Emperor and overthrew him in 1974. The communist militia Junta (commonly known as the Dergue) that overthrew the Imperial regime came to power and induced a political mobilization informed by the same political and economic questions about the peasantry and ethnic inequality that the student movement articulated earlier (Zwede, 2002). The manner in which the political forces organized themselves in the lead up to the revolution and thereafter depicts the prevailing view of nationality and state in Ethiopia. Broadly put, and to borrow Aron’s (2006, p.55) terminology, there were and still are two radically opposite views on the definition of Ethiopian-ness. One viewpoint emphasizes the civic view of citizenship as opposed to that of ethnic identity in the definition of "Ethiopian-ness” and the notion of nationality and state. Proponents of this view maintain that Ethiopia was able to form a common cultural space for the complex sociocultural system that exists, akin to experiences in countries like China and India. Levine (2000), for instance, argues that historically autonomous societies in Ethiopia have, over time, evolved into a more or less single social system. Hence, according to this viewpoint, the 62 Ethiopian citizenry takes precedence over individual ethnic identity. The pan-Ethiopianists, who admit that Ethiopian state was formed under the influence of the Amhara cultural base, contend that both the ancient class system and the superstructure of the modern Ethiopian state were based on elite integration of different cultures rather than on the exclusive domain of the Amharas (Aron, 2006). The contrasting viewpoint gives prominence to ethnic identity and regional allegiance over the civic notion of Ethiopian citizenship. According to this viewpoint, the nation is an empire built by the forceful annexation of part of its society, at best, or as a colonial state, at worst. Proponents of this view maintain that state power was used as a tool of domination by one ethnic group over the others, resulting in deep historical grievances (Jaleta, 1991; Hassan, 1994). Or put mildly, state construction in Ethiopia is undertaken within the hazy sense of multiple nationalisms (Tareke, 1996). Leaving aside this large and important interpretive controversy surrounding the process of nation building by successive emperors, there is little dispute that state formation in Ethiopia is an incomplete project. As Eshete (2003) observes, the fact that differences over the present dispensation are fought out as battles over historical interpretation is a testimony both to the weight of Ethiopia's past and its political inconclusiveness. Like earlier rulers, the Dergue regime was unable to create a viable economic program. The large-scale planning exercise it attempted to implement was mainly focused on changing the ownership of the means of production to the state, rather than unleashing the country’s growth potential. The regime introduced new state institutions of economic and political control, such as peasant associations and cooperatives, marketing boards and a worker’s party (Geda, 2008; Ofcansky and Berry, 1991). With these initiatives, the Dergue not only wasted a significant 63 amount of public resources but also stifled private initiatives. As Abbink (2006) notes, because of its dogmatic, top-down, and authoritarian form of state socialism, repressive domestic policy, and the crippling war with Eritrea and other rebel movements, Ethiopia under the Dergue did not succeed in achieving legitimacy, stability or economic growth – let alone justice, freedom and well-being for its citizens. The government’s resettlement and villagization programs were also very unpopular. It is no wonder that the peasantry embraced the 17-year armed struggle that eventually led to the downfall of the Dergue regime in 1991. 3.2 Post-1991 Political Settlement The Ethiopian People’s Revolutionary Democratic Front (EPRDF), a coalition led by the Tigray People’s Liberation Front (TPLF), came to power in 1991 and adopted a much more “radical” political settlement approach. In what has been described as an “experimental project,” the EPRDF regime has reconstructed the Ethiopian state under the banner of ethnic federalism, redefining the whole notion of ethnicity, nationalism and state formation (Abbink, 2011).16 The objective of this third reconstruction of the Ethiopian state is described as the creation of a new Ethiopian identity that celebrates diversity and allows a certain level of autonomy to different ethnic groups. Opinions on the nature and value of Ethiopia’s ethnic federalism vary markedly. Such disagreement further reveals the extent of the polarization among the Ethiopian elite and the divergent views on the very question of state formation. Some describe the experiment as an 16 EPRDF, the Ruling Coalition, is composed of four parties; the Tigray People’s Liberation Front(TPLF), the Amhara National Democratic Movement (ANDM), the Oromo Peoples’ Democratic Organization (OPDO) and the Southern Ethiopia People Democratic Organization (SEPDO). 64 “accommodationist” effort aimed at discrediting both the assimilationist and the secessionist options and as such offering a third way to create the Ethiopian state anew (Abbay, 2004). Others, however, see it as balkanization (Turton, 2006). A 2009 report by the International Crisis Group suggested that for Amhara and national elites, ethnic federalism impedes a strong, unitary nation-state. For ethnic-based rebel groups like the ONLF (Ogaden National Liberation Front) and OLF (Oromo Liberation Front), which respectively struggle for self-determination of the Somali and the Oromo ethnic groups, ethnic federalism remains artificial. While the concept has failed to accommodate grievances, the report notes, it has powerfully promoted ethnic self- awareness among all groups (ICG, 2009). There are also those who support ethnic federalism in principle but oppose the manner in which it is being implemented. Federalism, critics argue, was only given lip service. Abbink (2011), for instance, argues that the decentralized powers, accorded to regional and local authorities, are nominal. Stronger than any previous Ethiopian state, the federal state, he maintains, “has developed structures of central control and top-down rule that preclude local initiative and autonomy” (2011, p.596). Critics underscore that the leading member of the coalition, TPLF, created the other regional parties within the Ruling Coalition with the strategy to manufacture a political support base and rule the country in the name of all the peoples of Ethiopia.17 Critics look back at the 1990’s as the lost opportunity as far as creating inclusive political and economic institutions. Despite the adoption of a strong constitution that could have helped 17 The process by which the coalition was established is extensively investigated. See, for instance. Lata, 1999; Aalen, 2000; Gudina, 2004; Bekele et al., 2016, among others. We will discuss some aspects of the process in the next section while presenting the ideological underpinning of the Ruling Party. 65 lay a firm foundation to build a democratic federal system, the argument goes, the Ruling Party, resorted to a totalitarian and dictatorial approach and failed to implement the constitution in practice. Though the spirit of the transition and the subsequent constitution was to create a decentralized democratic system, in practice the government continued the longstanding authoritarian political culture in Ethiopia and instituted a totalitarian system of government using formidable bureaucratic control that reached from the federal palace down to rural kebele. The result was Ruling Party domination of all spheres of Ethiopian life (Hagmann, 2006).18 As Lyons (1996) observes, the ruling EPRDF used the early years of the transitional period, before the 1992 local and regional elections, to put in place mechanisms that bolstered the EPRDF's ability to control and dominate political life during the Ethiopian transition. According to Lyons(1996), the Ruling Coalition's cadres controlled the powerful kebeles in nearly every constituency and, in the absence of functioning independent election committees, this control allowed them to determine when and to whom they distributed voter registration materials. The EPRDF militia served as the transitional national army, leaving opposition parties vulnerable to intimidation, violence, and fraud. Indeed, these parties often had their offices closed and their officials arrested or harassed. This power imbalance encouraged parties – particularly those unprepared or ambivalent about participation – to discredit rather than strengthen the electoral processes (Lyons, 1996). The constitutional process that led to the establishment of ethnic federalism is also often criticized for the procedures by which it was established. Following the exclusivist and authoritarian political tradition, the EPRDF regime excluded a number of political forces from 18 In Ethiopia’s government structure, the Kebele is the lowest level of government. It is akin to neighborhood associations in the US. 66 the transitional process. Among those excluded, for example, were political groups organized along the lines of a multi-ethnic platform (Tronvoll, 2000). Hence, the ruling coalition alienated many groups, given the very selective and narrow approach it chose to adopt in the formative years. As an ideologically driven party and true to its character and history, the EPRDF was suspicious and careful not to admit those organizations it considered detrimental to the creation of an ethno-regionally structured system. The transition process was opened up to some small ethnic parties – those newly organized under EPRDF tutelage – while not invited were other notable organizations such as the Workers Party of Ethiopia (WPE) and several non-ethnic parties united in exile (Lyons, 1996). The fact that the constitutional drafting process was not inclusive has probably resulted in a more extreme document than would have emerged from a more diverse body. As Sunstein (2001) notes, when like-minded people are talking mostly with one another, they are likely to end up thinking in a more extreme version of what they thought before. The two critical parties during the transitional period, OLF and TPLF, had strong views about self-determination. The inclusion of ideal self-determination and provision of a secession option in the Ethiopian constitution is a good example of what can emerge when only like-minded groups talk to one another. Had the process been inclusive enough, deliberation likely would have provided the opportunity to reflect and reason out a middle ground short of secession. 3.3. Ideological Underpinnings: Revolutionary Democracy and Developmental State The ideology of “Revolutionary Democracy" coupled with the notion of “developmental state” has driven the project of state building in Ethiopia since 1991(Vaughn, 2011). Though a subject of heated debate in the Ethiopian political discourse, finding a precise meaning for it is 67 difficult, whether one goes through party documents or engages senior party officials in discussions. As Vaughn (2011) notes, it is not even clear how much even members of the Ruling Party share and understand about the ideological precepts of revolutionary democracy. From a few pieces that the late Prime Minister Meles Zenawi has written, Revolutionary Democracy is contrasted with “neo-liberalism” and used to describe the type of alliance and political economy the regime sought to establish. As Vaughn notes, Revolutionary Democracy embodies the aspirations of the Ruling Party to forge a “direct alliance with the people” (2011, p. 620). Despite its imprecision, the notion of revolutionary democracy has anchored shifting constellations of the party-state relations and changing strategies of political mobilization and organization, in Zenawi’s all-encompassing and fundamentally non-liberal political aspiration to forge a direct “coalition with the people” (2011, p. 619). In Zenawi’s view, to achieve its developmental objectives, the Ethiopian state needed to build an effective developmental coalition and create a political economy conducive to development. Zenawi further argues that neo-liberalism is unfit for countries like Ethiopia whose socio-economic base is mainly agrarian.19 It was, Zenawi believed, a futile exercise to apply neo-liberalism to socio-political problems of non-capitalist societies. In such social structures, revolutionary democracy, which “has the vast peasantry class as its social foundation,” is more relevant (Alebachew, 2012, p.16). Ethiopia, therefore, needed a different type of political organization that mobilizes the vast peasant class as its social foundation. Akin to Lenin’s thesis on bourgeois democracy and the proletarian dictatorship, from which the concept was drawn, revolutionary democracy 19 Zenawi used the term neo-liberalism to capture the 20th century resurgence of 19th century laissez-faire economic polices such as privatization, deregulation, free trade, reduced government spending, and so forth, with the objective of increasing the role of the private sector in the economy. 68 advocates the establishment of mass associations as the basis for state power. The concept is used to describe both political organization and social mobilization. The idea is that until the agrarian society is transformed into a capitalist society, revolutionary democracy will be used to describe and guide the alliance between the state and the peasantry. When the social structure changes from agrarian to capitalistic, the argument goes, revolutionary democracy will wither away while neo-liberalism triumphs. As such, revolutionary democracy is a precursor to neo- liberalism. Critics of the Ruling Party, for their part, use the term “revolutionary democracy” to describe all the ills of the regime rather than its strategy. Gudina (2011, p. 676), for instance, argues that the term “revolutionary democracy describes the totalitarian nature of the state.” He describes it as the best example of yet another dictatorial regime’s invoking of “democracy” as a strategic tool rather than a matter of conviction. Gudina’s view is that the practice of revolutionary democracy prevents the emergence of an open political space and a democratic transition; it allows and even mandates a fusion of party and state. Not only has the ideological fusion undermine the separation of powers and the rule of law, but it also negates the functioning of any genuinely representative government or active citizenry (Gudina, 2011; Vaughn, 2011). Calling it a bricolage, Nicolas (2012) describes revolutionary democracy as neither revolutionary nor democratic. For Nicolas revolutionary democracy is akin to Leninism, Marxism, and Maoism with its authoritarian tendencies. Essentially, the banner of revolutionary democracy has remained a powerful fighting tool used to exclude external and internal enemies. Vaughan points out that the conceptual opacity of revolutionary democracy and its ongoing mystery at the popular level likely had the political utility of allowing the Ruling Party to run a “managed political process, premised on order, stability and authority” (2011, p. 635). Similarly, critics have also raised concerns about the term “democratic centralism,” which is a crucial 69 principle of revolutionary democracy. Because democratic centralism requires the acceptance by lower bodies of decisions made by higher bodies without any serious debate or discussion, it poses a risk of blocking open democratic discourse and local initiatives and, thereby, disempowering citizens (Gudina, 2011). In addition to linguistic and related social structure issues, Zenawi opposed neo- liberalism because of its inherent limitations, such as its free market and limited state fundamentalism. For developing countries like Ethiopia, where there are significant market failures, the argument goes, an active interventionist state is required. The responsibility of bringing forth the required change in social structure is thus primarily placed on the state, hence the notion of developmental state. Ethiopia’s Ruling Coalition tends to emphasize the positive role of the state in the economy. The state is a pivotal feature of the EPRDF regime: the exalted image of the state mirrors the experience of the Asian Tigers and expresses the ideological way in which the Ruling Party shaped the strategic direction of the Ethiopian government. In due course, the government began to describe itself as a developmental state, a term used to describe the experience of Japan and Asian countries. Vaughn draws parallel between the notions of revolutionary democracy and developmental state. The coming to the fore of the concept of developmental state, Vaughn argues, indicates the evolution of the concept of revolutionary democracy over time. As mentioned before, the Ruling Party, like most other active political groupings in Ethiopia, had strong socialist aspirations. As explicit talk of Leninism has faded over the years and the ultimate socialist aspirations have changed, the politically non-liberal conception of a broadly encompassing role for the party alongside a powerful developmental state has persisted and been reinvented as the party’s terminology (2011, 623). As part of its developmental ideology and drawing on the theory and practice of both revolutionary democracy and the development state, 70 the ruling party developed and implemented its own version of industrial policy (IP). It is to that industrial policy that we now turn. Our task is to provide an overview of that policy since 1991 with respect to its genesis, substance, and policy instruments. In Chapter four we will analyze Ethiopia’s post-1991 IP in more detail. 3.4. Post 1991 Industrial Policy: Genesis, Content and Policy Instruments Although a full-fledged industrial policy in Ethiopia is a post-1991 phenomenon, the current IP, as we saw in earlier sections, emerged following several stages that preceded the founding of modern Ethiopia (Zewde, 2002). Emperor Selassie hoped to modernize Ethiopia by expanding schools and health facilities, promulgating a constitution, developing infrastructure and engaging in medium-term planning (Geda, 2008). In the 1950s, the share of manufacturing to total Ethiopian GDP was about 1.5 percent, although foreigners accounted for over 75 percent of industrial activity (Oqubay, 2015). Most of these initiatives were thwarted by nationalization during the Dergue regime; the Communist regime also disrupted industrial and agricultural activity. The mid-1990’s was a period when the EPRDF Coalition20 (the Ruling Party, the Party, the Ruling Coalition, or the government) engaged in high-level policy deliberation and began to forge central tenets of Ethiopia's economic development framework. In the following, we will describe the essence of Ethiopia’s post-1991 IP, covering the period from 1991 to present. The main objective of this exercise is to introduce the genesis as well as the basic content and policy tools of the IP, before presenting our political economy analysis in the next chapter. 20 I capitalize these terms because of their exalted status in the beliefs of their members. 71 Appealing to their banners of revolutionary democracy and the development state, Ethiopia launched initiatives like the Agricultural Developmental-Led Industrialization (ADLI). From the outset, the EPRDF government focused on the rural economy (Ohio, 2009). ADLI's goal was to build a modern industrialized economy initially using agriculture as the mainstay of the economy. Veteran government officials21 identify the following as some of the reasons that contributed to a confusing pastiche: i. ADLI lacked proper definition beyond the statement that agricultural development should lead industrialization. It was not clear as to what was meant by industrialization and what it takes to achieve it; ii. The development actors were not well defined. Specifically, the role of the private sector lacked articulation; iii. There were ideological battles within the leadership of the Ruling Party, and some in the Party leadership believed that it was possible to build a state that was both semi- socialist and semi-capitalist. The confusion ran so deep that the-then party leader, the late Prime Minister Meles Zenawi, at one point publicly proclaimed that Ethiopia was building white capitalism, a terminology Zenawi puzzlingly used to reject those that had strong leftist-leaning ideology. On the economic front, the high-level policy deliberations reinforced developmentalism as a state ideology around which everything else revolves.22 As discussed earlier, the ruling coalition had a strong leftist tendency and believed in the positive role of the state in the 21 Interviews (December 2015, May 2016) 22 On the political front, these deliberations focused on the ethnic-based federal system and how to strengthen it. 72 economy. Such a belief coupled with the successful developmental experience of the East Asian economies encouraged the ruling coalition to adopt a policy direction that emphasized an activist state in the advancement of the national development agenda. Given the continuing ideology of revolutionary democracy, the policy direction included a related purpose of changing the political economy from one that is unfriendly to productive activities to one that is inhospitable to rent-seeking activities (Zenawi, unpublished). Party leaders described the state, as we have seen, as a democratic developmental state. Although only minimally defined, the idea was that Ethiopia was to imitate the experience of East Asian counties and this theme became a central part of public discourse. A written policy and strategy, however, had to wait until 2000. In 2002, the government published and widely shared with the public different policies and strategies, including what was called the Industrial Development Strategy Document, which this study uses as a primary reference document. These strategy documents, as well as the foreign and national security policy and the agricultural and rural development strategy documents, among others, described the essence of the Ethiopian developmental state (Oqubay, 2015). These documents mentioned -- as well as speeches, publications, public debate and other communication modes -- were important steps toward progressive industrial policymaking (Oqubay, 2015). They put into the public sphere the sketch of a political economy framework for industrial policy rather than a comprehensive and detailed industrial policy.23 These documents and other means also provide useful insight into the evolving industrial policy process in 23 Interview with a veteran Ruling Party member, who was a first-hand observer of the post-1991 events (May 2016). 73 Ethiopia. Let us examine in more detail the content of the resultant IP. Ethiopia’s industrial development strategy has been keen to promote export-oriented and agriculture-led industrialization through labor-intensive industries (Altenburg, 2009). The overall objectives of Ethiopia’s IP are thus to change the structural characteristics of the economy from low productive to high-productive sectors to achieve the goal of industrialization. The IP can generally be categorized as selective as it identifies priority sectors and sets sector-specific goals for the priority sectors. The priority sectors have been: textiles and garments, meat, leather and leather products, agro-processing (including sugar and sugar-related industries), construction and the development of micro and small enterprises (MSEs) (Altenburg, 2009; FDRE, 2002). Textile and garment and leather sectors were given special attention and focus. Since 2002, the priority sectors have been updated to include floriculture and horticulture industries and some import-substituting industries such as engineering and pharmaceuticals. Successive national development plans from the World Bank sponsored Poverty Reduction Strategy Paper (PRSP) through the Plan for Accelerated and Sustainable Development (PASDEP) and the Growth and Transformation Plan (GTP) I and II also have reflected the changes in sectoral focus over the years. The revision and refinement of the IP and strategy have continued as recently as 2013, when the government announced a revised strategy. The revised plan had three phases: • Phase 1 (2013-2015) focused on enhancing the productivity of major industries by ensuring that light industries had linkages with other sectors including agriculture. • Phase 2 (2016 - 2020) zeroed in on building new vital sectors such as heavy metal and chemical industries while ensuring linkages with the light-manufacturing sector and as a 74 foundation for post-2025 transformation. • Phase 3 (2021 – 2025) aspired to build high-tech sector, enhance the capacity of high- tech industries and deepen and expand heavy metal and chemical industries while ensuring strong linkages with other sectors (Ministry of Industry, 2013). The government has utilized a variety of industrial policy instruments to realize the objectives outlined in the industrial development strategy. The government targeted supports to develop the priority sectors. The supports included economic incentives, such as tax holidays, export incentives, and favorable financing; capacity building activities, such as benchmarking, business matchmaking, twining (for experience sharing) of Ethiopian firms with firms from other successful countries; marketing and procurement support. Cluster development and direct public investments also have been among the industrial policy instruments (FDRE, 2002; Ethiopia Ministry of Industry, 2013). Beginning in the mid 1990’s, the government also established sector-specific support institutions such as the Leather Industry Development Institute (LIDI), the Textile Industry Development Institute (TIDI), and the Metal Industry Development Institute (MIDI), among others (Ethiopia’s Ministry of Industry, 2013). These institutions provide overall support to firms in their respective industries and include training, market linkages, quality improvements support and technical support, such as merchandising. The various IP instruments and institutions the government used as part of its industrial policy and strategy were an attempt to implement the overall approach that government adopted since 1991 based on its underlying ideology. The government, as we have seen, has embraced the primary mission of building of an active developmental-friendly state under the banner inter 75 alia of revolutionary democracy. This mission, in turn, requires altering the rent-seeking political economy towards a productivity-enhancing political economy. To achieve this goal, the government used several kinds of incentives as part of its industrial policy instruments. The implicit theory here is that economic man -- homo economicus -- is entirely self- interested and amoral. The policy architects, guided by revolution democracy ideology, assumed that the fundamental structure of the economy was full of rent-seeking behavior and the active state intervention was meant to overcome the negative attributes of this rent-seeking political economy. As we will demonstrate in subsequent chapters, the overwhelming emphasis on material incentives and constraints severely limited the effectiveness of the policy instruments. As political economist Samuel Bowles (2016) notes, no matter how cleverly designed, material incentives and constraints alone cannot provide the foundation for good governance. In summary, this chapter has presented a review of Ethiopia’s socio-economic and political profile as a background for understanding the country’s emerging industrial policy. As part of the historical review, the chapter identified the challenges associated with Ethiopia’s developing a sustainable political settlement. The analysis reveals that efforts exerted by the successive emperors to establish a political settlement failed because they adopted clientelist politics and built an extractive state system. As the economic basis of the political power was based on resources extracted from the peasants, the state increasingly became the space for a patron-client relationship, which facilitated the predominance of the Ethiopian state in the control of material resources of all kinds. As access to state power translated into access to economic privilege and social status, the successive imperial regimes continued to practice a cultural and political suppression of subordinate ethnic groups, forming the basis for deeper social cleavage. Over time, as the level 76 of peasant and ethnic dissent and conflict intensified, the core institutional and political arrangements of the imperial regime begun to unravel, leading to its eventual demise. The Dergue regime was also unable to form a sustainable political settlement. In post-1991 Ethiopia, the Ruling Party focused on developmentalism in an effort to establish a sustainable political settlement. 77 CHAPTER IV A POLITICAL ECONOMY ANALYSIS OF ETHIOPIA's POST-1991 INDUSTRIAL POLICY In this chapter and next, I present the political economy analysis of post-1991 industrial policy experience in Ethiopia using -- as a primary framework of analysis -- Whitfield et al.’s framework for the politics of African industrial policy. Whitfield et al. identify mutual interest, pockets of efficiency and learning for productivity as the three necessary conditions for the successful implementation of industrial policy in Africa. The main objective of the analysis is to assess whether or not the necessary conditions have emerged in post-1991 Ethiopia and describe the impact thereof.24 As part of this analysis, as the Whitfield et al. model has it, I will explore the casual linkages between the necessary conditions and the variations in the different configurations of the clientelist politics identified in the model. To help explore the causal linkages between mutual interest and the variations in different configurations of clientelist politics, I divide the post-1991 Ethiopia into three different periods: the Period of Vulnerability (1991-1994); the Period of Domination (1995-2012); and the Period of Vulnerability and Contestation (2013-present). The timeframe is based on the Whitefield et al.’s configurations of the dominant clientelist political organization during each period. The Period of Vulnerability is when, in relative terms, there is strong distribution of power outside the ruling coalition. In other words, during a period of vulnerability, the Ruling 24 As mentioned earlier, the third necessary condition, learning for productivity, will be discussed separately in Chapter five. 78 Party faces resistance from outside forces (including social and political forces) that can have sufficient strength to pose a threat. The Period of Contestation occurs when, in relative terms, there is division of power within the ruling coalition. In this case, the resistance comes from within the Party as power is dispersed to different factions within the Party. The Period of Domination takes place when the distribution of power outside the ruling coalition and within the ruling coalition is weak. As the strength of the Ruling Party is at its best during this period, the necessary conditions can emerge, allowing the government to develop and implement effective industrial policies. The Period of Vulnerability and Contestation is when there is strong distribution of power both outside and within the ruling coalition. This is when the Ruling Party is at its weakest. This chapter focuses on mutual interest and pockets of efficiency, two of a trifecta of conditions Whitfield et al. identify. In Chapter five, I will discuss the third condition, learning for productivity, in a broader context of state-business relations. 4.1. Period of Vulnerability (1991-1994) The first period in our categorization covers the 1991 to1994 period. This period can be described as a period of vulnerability, as there was a relatively strong distribution of power outside the Ruling Coalition during these years. Having just won the civil war, the organizational and military strength of the Tigray Peoples Liberation Front (TPLF) was at its peak. As the other members of the EPRDF Coalition were subservient to TPLF, as discussed earlier, the Party did not face significant internal contestation. On the other hand, during this period, the power outside the ruling elite was strong and very fluid, posing a high degree of vulnerability for the ruling elite. In other words, the Ruling Party had faced strong resistance and opposition from forces opposed to it. 79 The challenge posed by the Oromo Liberation Front (OLF) was particularly strong and forced the Ruling Party to focus on immediate survival issues as opposed to fostering the development of the conditions necessary for the successful implementation of an IP. The OLF and the Ruling Party EPRDF were the two major forces that shaped the transition process, even though other small parties were also part of the process. Political observers note that the transitional process nearly broke down in late I991 and early I992 when tensions between the EPRDF and the OLF escalated from “bickering within the Council of Representatives to military clashes that threatened to return the country to full-scale civil war” (Lyons, 1996, pp.125-126). It was after the signing of the cease-fire agreement between the two parties in April 1992, following talks facilitated and co-chaired by the Provisional Government of Eritrea and the United States, that regional and local elections were held in June 1992. However, the agreement did not last long, as disagreements on the election process led to OLF's insurrection. Though mostly unsuccessful, the OLF's insurgency left the nation deeply divided as a majority of the Oromo people felt excluded and marginalized (Gudina, 2011). Besides, as discussed in Chapter three, the type of the political settlement the Ruling Coalition sought to establish and the exclusionary approach it adopted had put its survival in a precarious situation. The Ruling Coalition faced opposition from political forces that it excluded from the transitional process. The opposition also came from several alienated groups including the significant part of civil society, the urban elite, and the private sector. Thus, the Ruling Party faced a legitimacy crisis that undermined its capacity to facilitate mutual interest. The Ruling Party made efforts to use the June 1992 and the May 1995 election process to secure legitimacy. These efforts were largely unsuccessful. With regards to the 1992 election, OLF’s decision to boycott the elections was a particularly crucial indicator that the election was going to be a 80 failure. As such, the June I992 regional elections failed to provide the transitional regime with a genuinely popular mandate (Young, 1997). As Lyons (1996) observed, the regional and national elections held in May 1995 also elicited little interest from most Ethiopians and even the international community. Major opposition candidates had boycotted the election making it “anticlimactic,” as Lyons’ eloquently described it. The government's inability to develop a vision and nurture the reality of mutual interest during the transitional period is understandable as the Ruling Party faced a period of vulnerability given the strong centers of power outside the Party. In this regard, the developments during the transition period are consistent with the Whitfieldian framework. What is of significant interest to us is how the approach the Ruling Coalition adopted to deal with the vulnerability left lasting damage. This damage, unfortunately, has significantly diminished the prospect of developing the mutual interest required for a successful IP. First, the Ruling Party’s "bold-experiment" on ethnic federalism stirred considerable controversy and renewed opposition. As opposed to winning over opponents of the new federal system through the power of persuasion, the ruling coalition resorted to military force and systemic exclusion. The purposeful exclusion from the constitutional process of groups at odds with the new federal system as well as forceful expulsion of forces like Oromo Liberation Front (OLF) created an environment filled with suspicion, tension, and rivalry, making it impossible to nurture the development of mutual interest. This occurred even though OLF should have been a natural ally of a diversity-respecting federal system. Some argue that the state’s repressive actions contributed to totalitarianism and a disregard for due process of law and constitutionalism. The implications of EPRDF’s internal power dynamics were also worrisome from the beginning. The TPLF established a kind of patron-client relationship with the other three 81 members of the EPRDF Coalition, and in this relation the latter were entirely subservient to the former (Nicolas, 2012; Gudina, 2011). The establishment of such a relationship laid the basis for similar types of dominance and dependence across all levels of government. Since the state in Ethiopia has historically been in control of all material resources, getting access to people in power had become the shortest and most secure path to wealth creation. As I will show shortly, the Party that vowed to dismantle the patronage network and root out rent-seeking activities had become a playing field for interest group politics and a breeding ground for patronage networks. Even the much-hailed decentralization agenda during the transition period was not free from suspicion. Despite efforts exerted in devolving power to the regional states, zones and woredas,25 critics argue that these efforts did not result in genuine decentralization. The main argument is that the TPLF cleverly utilized the Party and state structure to ensure its dominance rather than instituting genuine federalism (Nicolas, 2012; Gudina, 2011). In the Party structure, the notion of democratic centralism helped ensure that the agenda set by the TPLF was implemented across the board. Although it is a fundamental principle of revolutionary democracy, democratic centralism is described by the critics as in reality a communist organizational policy that keeps the vanguard party under top-down control. Because this governance principle requires the acceptance by lower bodies of decisions made by higher bodies without any earnest debate or discussion, critics claim that it risks blocking open democratic discourse, weakening local initiatives and disempowering citizens. The buck stops with TPLF on key decisions, critics maintain, and democratic centralism is used to shackle and 25 Woreda is an Amharic term. In the Ethiopian federal structure, there are nine regional states and each region is divided into zones, analogous to U.S. counties. The zones are then further divided into woredas while woredas are composed of kebeles, which are the lowest level of government. 82 get member parties in line with TPLF's diktats. (Nicolas, 2012; Gudina, 2011). Such practices cemented the patron-client relationship within the Party; laying a strong foundation for the clientelist political economy. Since the economic and political institutions established were “extractive,” as previously discussed, there was ample opportunity for the patron to extract disproportionately high benefits. The natural tendency for the client was thus to become a patron itself. The unfortunate result is a dense network of patron-client relationships with extractions from the society and state at every level. As Young (1997) notes, the cadres that joined the coalition members generally had a low level of education and little experience. Young also argues that they were opportunistic and lacked legitimacy with their constituencies. The origin of the parties and the subsequent power- relations the TPLF introduced, many argue, had laid the foundation for the patron-client relationship between TPLF and the other parties, which would become a defining feature of the post-1991Ethiopian political economy. The ensuing political economy had unintended consequences. In such an environment, it was impossible to nurture a mutual interest focused on the national development goals, one of the Whitfieldian conditions necessary for successful implementation of industrial policy. The same is true with respect to the second Whitfieldian condition: pockets of efficiency. One leg of the Whitfield et al.’s three-dimension triangle model, a pocket of efficiency refers to the ability of the state bureaucracy to formulate and implement a localized policy. The model’s focus is on pockets of efficiency as opposed to realizing efficiency across the entire state machinery. As Whitfield et al. note, “countries do not need to have strong capabilities across the state bureaucracy, nor is it possible. Instead, what is needed is a pocket within the bureaucracy 83 where there are strong state capabilities” (2015, p.20). Recall that the developmental state literature strongly underlines the importance of an independent institutional structure. As presented in Chapter two, a developmental state needs to have an internal organization that closely resembles a Weberian bureaucracy; with a distinct sense of corporate coherence, the state can manage, lead and direct the development project. A pocket of efficiency is the concept Whitfield et al. used to describe such a distinct sense of corporate coherence. The emergence of pockets of efficiency in state bureaucracy requires that the bureaucrats in charge of the design and implementation of industrial policy garner sufficient trust from the ruling elites and also have sufficient knowledge of the specific industries the government promotes. As long as these two conditions are fulfilled, the pocket of efficiency can exist “in a sea of inefficient and corrupt bureaucracy” (Whitfield et al. 2015, p.20). Ethiopia’s post-1991 IP experience shows that it has not been possible to develop these pockets of efficiency even though the Ruling Party did accord serious attention to the agenda of creating strong state capabilities. Since the early 1990’s, the Ethiopian government embarked on ambitious civil service reform programs with a clear objective of creating merit-based and independent civil service institutions. The government aspired to transform the overly centralized and socialist structures into a meritocratic civil service – fit for the new federal system – that could implement the nation’s development (Oqubay, 2015). Reform efforts in the early 1990’s had registered some results. For example, a financial management proclamation and a civil service law as well as new systems for budgeting, procurement, and personnel management were developed. There was no evidence, however, that pockets of efficiency had begun to emerge during this period. More generally, the reform efforts 84 had not translated into sustained improvement in output performance at the federal or regional levels (World Bank, 2005). The unsatisfactory outcome of the reform efforts in the early 1990’s should not be surprising, for, as we have indicated earlier, the Ruling Party was vulnerable to opposing forces and focused much of its energy on survival. As Whitefield et al. note: A higher degree of vulnerability results in ruling elites focusing on immediate political survival and meeting distributional demands in order to keep the ruling coalition together, which means that the distributional politics absorb resources and influence political appointment to public office (2015, p. 97). As the Ruling Party focused on survival issues, the civil service reform programs implemented during this period were not deep enough to lead to meaningful improvements. Trusted party loyalists – rather than competent public servants -- filled key positions as the Ruling Party was not secure enough to leave the task of designing and implementing industrial policies to civil servants competent in planning and executing industrial policy. As a result, operational inefficiencies continued to characterize the public service at both federal and regional levels. More specifically, in this “period of vulnerability” the Ruling Party was vulnerable to pressure and dissent from outside the party with the result that it was able neither to forge mutual or common interests nor generate pockets of efficiency. Hence, two Whitefieldian conditions for a successful IP went unfulfilled. Let us now examine whether things turned out differently during the second period 4.2. Period of Domination (1995-2012) Upon completing the transitional process in 1995, the Ruling Party had technically transitioned out of the period of vulnerability. The power outside the Ruling Party was weak as the OLF had already demobilized its forces and the rest of the opposition groups were weakened 85 and unable to pose a significant threat to the EPRDF Coalition. Internally, given TPLF’s dominance within the coalition, the Ruling Party had little to no internal contestation. With the exceptions of a short-lived anomalous episodes in the years 1998 and 2005 (we will return to these shortly), the Ruling Party enjoyed an extended period of stability characterized mainly as a period of domination. This situation fits the Whitfieldian theory with respect to the role of the configuration of clientelist politics. The Ruling Party had almost a totalitarian grip on power and dominated the nation’s political, social and economic forces. The period under consideration is thus the most critical period in Ethiopia's IP experience because it is during this period that Ethiopia's IP evolved and took its characteristic shape. As part of its IP strategy, described earlier in this chapter, the government developed and implemented a sequence of development plans including thee Sustainable Development and Poverty Reduction Program (SDPRP), which ran between 2002 and 2005. The first anomalous episode occurred in 1998. This year was significant not only because that was when the bloody Ethio-Eritrean war broke out but also because fierce opposition erupted within the TPLF, the dominant faction within the EPRDF. The result was a split within the TPLF. The causes and consequences of the Ethio-Eritrean war are well beyond this paper’s scope, but we will address briefly Eritrea-related issues and how the government’s management of war caused significant contestation within TPLF and finally posed a real threat to regime survival. Party insiders argue that the rift on the Eritrea “issue” within the top leadership of TPLF started much earlier than the 1998 war, although the dispute became public only after the war broke out. A group of senior TPLF leaders, led by the then-Defense Minister Siye Abraha and the Prime Minister's advisor Tewolde GebreMedhin (hereafter referred to as the Tewolde-Siye 86 group) accused Prime Minister Meles of taking a soft stance on Eritrea from as early as 1994 when Eritrea invaded Yemen's Hanish islands. The Tewolde-Siye Group labeled Eritrea an aggressor and suggested that Ethiopia ought to reexamine its military pact with Eritrea while the Meles' group disagreed (Milkias, 2001). The rift deepened as Meles allegedly ignored a Tewolde-Siye group’s warning that came three months before Eritrea attacked Ethiopia, and Meles was seen as hesitant to take action on the Eritrean aggressors. During that war, intra-party rancor arguably was hidden from the public to demonstrate Ethiopian resolve and unity. The rancor became public shortly after Meles agreed to end the war when the Ethiopian army had a clear advantage and wherewithal but refrained to carry out regime change in Asmara. The rift spread to the rank-and-file of the TPLF members and the other three members of the EPDRF Coalition. Alliances formed and rapidly broke apart; the balance of power shifted from one group to another. Nonetheless, Prime Minister Meles maneuvered his way to political victory. He removed some political opponents from his party and from their public offices and threw others into jail (Lyons, 2006b). Strikingly, despite the intense internal contestation during this period, there was a semblance of unity at the national level due to the unforeseen consequences of the Ethio-Eritrean war, which helped mobilize public support for the government. Temporarily leaving aside political differences and their grievances against the government, Ethiopians from all walks of life had a common cause and supported their government. The government was able to mobilize human and physical resources in an unprecedented manner, which was in the end instrumental in the defeat of the Eritrean forces. Hence, during this period, the ruling coalition faced little challenge or vulnerability from forces outside the Ruling Party. Had it not been for this public support and national unity, there was the risk of a national crisis due to the severe conflicts within the Ruling Party. Without the unity that the war generated, the country might have come a 87 standstill or worse. The war with Eritrea brought about – at least for a while – what the ruling party in peacetime could not attain, namely, the Whitfieldian condition of mutual interest. Short-lived national unity also occurred during the 2005 national election, which was, arguably, the most consequential one in modern Ethiopian history. In an attempt to address the legitimacy issue, the Ruling Party decided to open up the political space and conduct a reasonably free and fair election. In a run up to the election, the Ruling Party and the opposition engaged in a relatively free and open public debate. Not only was the opposition provided with airtime in state-owned media, but the significant debates were transmitted live in state-owned media. Opposition parties were also able to organize political rallies and engage in extensive campaigning in the countryside, despite some reports of intimidation and violence against the opposition parties and their supporters. Overall, there was an atmosphere of hope and enthusiasm across the nation. The Ruling Party's reiteration of its commitment to further democratizing the country had generated expectations of change and power sharing (Abbink, 2006). I personally recall the peaceful conduct of massive public rallies on two consecutive days in Addis Ababa, the capital city. Even in government institutions where political discussions critical of the Ruling Party were considered a crime, people had begun to debate openly, taking opposing positions civilly, showing some sign of a free and open society. Unfortunately, the election process ended with devastating consequences, which took the country many steps backward. As Gudina (2011) observed, the very election in which the opposition won significant seats became, ironically, a turning point for the worst missteps in Ethiopia’s stumbling path to democracy. Troubling signs began to appear on the very night of the Election Day when the Prime Minister appeared on state television and declared a state of 88 emergency. Even before the results were made official, the Prime Minister declared an “overwhelming victory” for his party, a clear indication that his party had no interest in sharing power. Opposition parties for their part claimed that the Ruling Party had rigged the election and denied them the victory they had secured. One opposition party leader interviewed for this study described the Ruling Party’s actions as “daylight robbery.”26 When denied the request to hold new elections in contested constituencies, the opposition parties called for massive public resistance including demonstrations and civil disobedience. What followed was a short period of instability and violence leading to the killing of dozens of people, arrest of tens of thousands of alleged opponents and protesters and suppression of civil society groups (Abbink, 2006). Started by an Addis Ababa students’ spontaneous sit-in and strike on June 4th, 2005, opposition spread across the nation including a taxi drivers’ two-day strike and university students’ country-wide protest. Unfortunately, the government responded violently – killing dozens and wounding and arresting hundreds. Tensions continued to mount as the opposition accused the Ruling Party of election fraud and demanded new elections. The government, however, showed no mercy or willingness to compromise. After a significant delay, officials announced the results of a second balloting on September 5, 2005. The EPDRF was the winner with 371 seats or 67.8 percent of the votes. The two main opposition parties, Coalition for Unity and Democracy (CUD) and the United Ethiopian Democratic Front (UEDF), won 109 and 52 seats, respectively. There was a clear rural-urban divide as the opposition garnered seats in virtually all towns and urban areas, including a clean sweep of the capital, Addis Ababa. Even with contested official results, high- 26 Interview (May 6, 2016). 89 profile members of the Ruling Party lost their seats in parliament (though the Party reclaimed some of the seats through reruns), a sign of public rejection of the Ruling Party (Abbink, 2006). Following a series of public hearings and internal wrangling, one of the leading opposition parties, Coalition for Unity and Democracy (CUD), decided to boycott the parliament and announced a round of peaceful demonstrations. The government countered these with a new round of repression. By refusing to take its seat in parliament, the opposition also abandoned the opportunity to administer the capital city, and the government reacted by jailing leading opposition figures for treason. In an all too apparent return to authoritarianism, the Ruling Party tightened its grip on power by forcefully cracking down on the opposition. Before discussing this step backward, it is useful to ask what prompted the Ruling Coalition to open up the political space in the first place. One line of argument is that it was a show solely orchestrated for the consumption of the international community and with no interest in actually opening up political space in the first place. Others associate the opening up with the Ruling Party’s burning desire for legitimacy. What is certain is that, whatever the motivations, the Ruling Party had overestimated its chance of winning the election in a landslide. Senior party officials interviewed for this study recall internal party deliberations that strongly emphasized the need to conduct a free and fair election and the call on party cadres to work full-heartedly for its realization.27 The confidence of the Ruling Party might have come from its erroneous reading of the extent of public support it enjoyed and its assessment of the relative weakness of the opposition groups.28 Positions expressed in policy documents, public 27 Interviews (December 2015, May 2016). 28 There is also little doubt that the Ruling Party underestimated the opposition. The typical characterization of the opposition by the Ruling Party was "a fragmented group with no concrete alternative political program other than 90 statements made by the Prime Minister and other party leaders in the run-up to the election, and the content and focus of the electoral campaign clearly show that the Party had developed confidence about the depth and scope of public support (GCO, 2013). The government also must have felt that the relative success of its IP strategy (at least by its own measurement) in increasing crop productivity and the successful delivery on its promise of a pro-poor development strategy had strengthened its social base among the rural community. The triumphalist rhetoric on the remarkable economic growth achieved by the Ruling Party might have lulled the Ruling Party’s into the complacency and the (mistaken) belief that it had strong public backing. The public narrative during this period was that Ethiopia is growing faster than its peers and a successful IP is the critical determinant for the growth achieved. The growing recognition of Ethiopia's success in obtaining an accelerated economic growth had also helped build the perception that the country was on the right track. With its narrative of successful and popular developmentalism, the Ethiopian government accorded little attention to the underlying political economy issues. The government failed to exert even minimal – let alone sufficient – effort to correct the damages caused during the transition period, for instance, the popular belief in the government’s illegitimacy. Hence, the state failed to forge social mutuality and form a sustainable political settlement. The government’s disregard of the legitimacy gap is also clear from national development plans. A review of national development plans shows a modicum of governmental criticizing the Ruling Party." Indeed, such characterization was not too far from reality. The speed, at which the fragmented opposition organized itself, produced an alternative political agenda and garnered unprecedented public support was astounding. 91 awareness of the need to develop more inclusive economic and political institutions. Both the Plan for Accelerated and Sustainable Development to End Poverty (PASDEP -2004/05- 2009/10); and the subsequent Growth and Transformation (GTP) Plan (2010-2015) rarely mention the word conflict and political instability. The policy documents mention conflict only with respect to rural communities as if it were an isolated problem. The government seemed to be making a political case that political instability was no longer an issue in Ethiopia. Note, for example, the 2002 Sustainable Development and Poverty Reduction Program (SDPRP): “The primary notable achievement in Ethiopia in the early 90s was the end of internal conflict followed by successful transition made towards peace and democracy” (2002, p. 2). The plan further states – with scant evidence -- that the new federal structure had created the foundation for participatory development and citizen empowerment. In reality, the widespread perception of political and economic inequality and the deep division within the nation had made it difficult to rally many – let alone, most – Ethiopians behind a developmental cause. This difficulty makes it clear that IP cannot succeed without getting the political economy right. As Acemoglu and Robinson (2012) argue, development is both a political and economic process. In the case of Ethiopia, Moges (2010) suggests that the main impediments to economic development in Ethiopia emanate from a complex interaction of economic, political, social and institutional factors. He further argues that unless development strategies address these underlying forces, they cannot have lasting effects. The failure to address the underlying forces has also contributed to the unsuccessful efforts aimed at developing pockets of efficiency. During the period under consideration, the government had initiated and implemented several reform programs. For instance, the 92 Comprehensive Civil Service Reform Program (CSRP), which the government had embarked on in 1996, had aimed at ensuring good public service delivery to support the government’s socio- economic development agenda. By creating enabling legislation, developing operating systems, and training staff, the CSRP sought to build a fair, transparent, efficient, effective, and ethical civil service. Unfortunately, these efforts had an unsatisfactory outcome (World Bank, 2005). In 2002, in a renewed effort to accelerate the reform program, the government established a new ministry called the Ministry of Capacity Building. In 2004, the new office introduced a plethora of reform programs under the umbrella of a new Capacity Building Strategy dubbed Public Sector Capacity Building Program (PSCAP). According to Nigussa (2013), the first six programs under PSCAP were Civil Service Reform, Tax System Reform, Justice System Reform, District level Decentralization, Urban Management Capacity Building and Information and Communication Technology Development. Any one or more of these might have become Whitfieldian “pockets of efficiency,” although the comprehensive character of the reforms suggest that the government was going for the whole ball of wax. In 2005, the Ministry of Capacity Building did introduce a reform package called Business Process Reengineering (BPR) program and implemented in all government organizations. Several respondents, however, consider the BPR program a failure. Some studies did indicate that in some institutions the program had helped improve the delivery of public service. For instance, based on a survey conducted in two Ministries – Ministry of Education and Ministry of Trade and Industry – scholars Mengesha, and Common (2016), found that a notable transformation of service delivery had occurred. However, Nigussa (2013) correctly notes that the surveys were in 2006 and the results might have reflected initial enthusiasm rather than a sustained result. In 2010, following a merger of the Ministry of Capacity Building and Federal Civil Service Agency, the government established a new ministry called the Ministry of Civil 93 Service. In a further move that reveals dissatisfaction with the overall outcome of the BPR and other reforms, in 2018 the government introduced yet another management tool called the Balanced Score Card. The newly established Ministry of Civil Service had tried to improve the implementation of the reform programs, but there were no tangible outcomes – whether “pockets” or more systematic reforms – from all these efforts. One former senior government official complains that the reform programs have turned the civil service into “a laboratory of management theories.” Other respondents describe the reform efforts as “extremely tiring and a complete waste of time and public resources.”29 Others, on the other hand, highlight some positive elements including process mapping, improved office layout and the attention given to the development of quick wins that helped improve service delivery. The improved office layout, however, is also not without criticism. Nigussa (2013), for instance, expresses concern that the budget allocated to restructure the office layout might outweigh the gain in the improved service delivery. There are several explanations why the above-mentioned reform efforts have been much less than successful in Ethiopia. The reasons put forward include weaknesses in the design of reform initiatives, poor execution, capacity issues and lack of interest and commitment, among others. Reform programs have allegedly followed an overly top-down and general approach with very cumbersome reform initiatives that had lacked a clear focus. There was no sign that pockets of efficiency had been specified or developed. Lack of experience on how to manage and make good use of national and international 29 Interview (December 2015). 94 consultants and funding gaps have also contributed to the poor overall program design and outcomes. Failure to follow a properly integrated and sequential approach, inconsistency in performance evaluation systems, a weak sense of local and regional ownership, weak work culture, absence of well designed and implemented remuneration systems and poor technological adaptability also contributed to poor reform outcomes (World Bank, 2005, 2011; Nigussa, 2013). The existence of multiple and often incompatible plans and planning tools such as strategic planning, the Growth and Transformation plan, BSC, and so forth, has also reportedly resulted in significant confusions. Some organizations go so far as viewing the Growth and Transformation Pan (GTP) as – like BSC – just another failed planning tool (Nigussa, 2013). As numerous and partially plausible as they are, the above explanations do not convincingly explain why years of targeted efforts aimed at creating mutual interests and pockets of efficiency failed. Since the Ruling Party had enjoyed a relatively long period of domination, the government had a substantial opportunity to facilitate the needed development capabilities. At least, the potential was there for developing what Whitfield et al. call common interests and pockets of efficiency. Yet, as we have shown throughout this essay, from the early 1990’s the Ruling Party planted the seeds for failure. Focusing on the later condition for a successful IP, recall that for the emergence of pockets of efficiency in the state bureaucracy, in addition to having industry knowledge, the bureaucrats in charge of the design and implementation of industrial policy need to garner sufficient trust from the ruling elites. Recall also that the Ruling Party had laid a strong foundation for a clientelist political economy due to its exclusive approach and total reliance on material incentives. The only group the Ruling Party trusted were thus its clients, the cadres that joined the Ruling Party. As these cadres generally had a low level of education and little political 95 and military experience, they did not have the capacity and the industry experience to help form pockets of efficiency. The government also failed to attain its reform objectives because the politicization of the process thwarted its efforts. Form the beginning; the Ruling Party’s approach to the civil service reform agenda was problematic, mainly owing to its ideological dispositions. Due to its anti-elite and anti-urban tendencies, the Ruling Party viewed the bureaucracy suspiciously. The primary focus of the civil service reform was thus on recreating a civil service to the Party’s liking, as opposed to facilitating the development of pockets of efficiency for the common good. As Taube and Patz (2008) note, in the early 1990’s, the main focus of the government was on laying off the “cadres” of the Dergue. For instance, one of the most consequential decisions the Ruling Party was to fire forty prominent university professors merely because they had a different political opinion than the Ruling Party. Such an exclusionary approach continued to define the direction of the government, resulting in serious consequences in the years to come. The politicization of the tools and processes employed to reform the civil service also led to serious resistance to the reform agenda. For example, when the government relocated civil service jobs from Addis Ababa to the newly established regional governments, educated urban groups, generally opposed to the Ruling Party, attacked the move as nothing more than a way to dominate politically (Vaughn, 2011).30 The tool introduced as a system of appraisal (referred to as gimgema in Amahric)31 also 30 According to the World Bank (2011), following the redeployment of civil service staff to the regional states, by the late 1990’s staffing levels in the regions had reached over 320,000 while the size of the federal civil service reached 43,000. 31 Drawing on Maoist notions of ‘‘criticism and self-criticism,’’ Gimgema or evaluation is a practice developed by the TPLF during the civil war between 1974 and 1991, for use amongst fighters and peasants, as well as party 96 faced strong resistance. Government critics viewed it as patently a political tool used to humiliate and alienate those opposed to the Ruling Party’s political agenda. Veteran civil servants interviewed for this study recall the political and ideological element in employee appraisal processes. Instead of measuring the actual performance and merit of employees, the appraisals focused on subjective evaluations of the political views and loyalties of employees. In many instances, technical and narrowly partisan judgments or assessments have been at loggerheads, resulting in considerable opportunity costs. Miruts and Asfaw (2014) provide an interesting case study from Tigray Regional State in Ethiopia showing how the politicization of the civil service inhibits the civil service from playing its neutral, policy-implementer role. Unnecessary political interference coupled with such factors as scant separation of power, a lack of accountability, minimal networking in the civil service and poor oversight – all these factors undermined the civil service’s neutrality and professionalism. The government’s misguided conception of development is also partly to blame for reform failures and specifically for the state’s inability to develop mutuality and pockets of efficiency. As we argued in Chapter three, the Ethiopian government had adopted and assumed what Sen calls “a narrower view of development” (Sen, 1999), one that focuses on real GNP growth not just as means but as an end itself. An ampler view would have considered economic growth as one means to the more foundational goals of substantive freedoms, including the liberty of political participation. The 2005 election demonstrated that Ethiopians accorded value to these and substantive freedoms, and when there was a small opening in political space, the members. Vaughn (2011, p. 17) finds the reaction to gimegema hardly surprising, for it had emerged in the context of the TPLF’s determination to “eliminate ideas that don’ t benefit the revolution.” A part of the dialectic associated with class struggle, Vaughn argues, the gimgema practice had in effect offered “a basis on which to attack, often even humiliate, those who promoted alternative viewpoints, and has long been controversial” (2011, p. 17). 97 public responded with unbridled enthusiasm. Contrary to the claim by the Ruling Party members that the opposition had only the support of the urban elite, there was significant support for opposition parties in rural areas as well. The considerable support opposition parties managed to get in rural areas was particularly unnerving to the Ruling Party – given its firm conviction that it had a solid social base in the country side. For instance, according to Abbink (2006), it was too difficult for the Ruling Party to swallow that that one of the main opposition parties named Coalition for Unity and Democracy (CUD) – considered to represent mostly urban and business-class constituencies – managed to obtain a large and growing following among ordinary people in rural areas in central, western and northern Ethiopia. In contrast to the Ruling Party, which mainly focused on commercial facilities, the opposition focused on the absence of types of substantive freedoms, including political freedoms, transparency guarantees, and protective security. The Ruling Party's utter disregard for many kinds of freedom likely made it easier for the opposition to organize and grow to political prominence in a short period. What the Ruling Party failed to see was the extent and depth of public impatience and dissatisfaction with the government’s record. Lack of transparency and the pervasiveness of corruption and nepotism had resulted in significant public fatigue and even resistance. The public disillusion and cynicism about the Party and the belief in the malice of public officials was broad and intense. The profound disillusion with EPRDF among the non-party-affiliated trading class and the peasantry in the highlands probably explains CUD's ascent in the national political scene within one year of its reemergence in 2004 (Abbink, 2006). There was also a broad perception of the country’s unfair distribution of political and 98 economic power – distribution that favored a particular ethnic minority group and resentment to which the opposition parties had exploited to their advantage. A careful observer may find that such perception is probably exaggerated. Unfortunately, lack of transparency in government made it difficult to discern the breadth and depth of this grievance. The Ruling Party’s prevailing view, as we have seen, was that it had a strong support in the rural areas owing to the agricultural inputs and other supports such as food aid that it had provided to poor farmers. The Ruling Party was also overly confident in its organizational capacity for grass root mobilization during the election. In a run-up to the 2005 elections, the Ruling Party boasted that it had a well-incentivized membership base that exceeded four million people. Such overconfidence emanated from and also revealed the Ruling Party’s obsession with incentives and constraints. When the Ruling Party organized a massive public rally in the capital city Addis Ababa few days before the election, for instance, it was general knowledge that kebele officials forced or co-opted (through material incentives) people to participate. What transpired during the 2005 election shows that a system built on patronage may not be sustainable during difficult times. There were indications during the 2005 election that even members of the Ruling Party were tacitly supporting the opposition groups.32 The chances are that the cadres of the Ruling Party were reporting exaggerated levels of public support to the Party leadership. The genuine excitement that the then-Prime Minister showed in his election- eve speech mentioned above indicates that he probably had no idea that coercive means were employed to ensure the huge public turnout. He described the gathering “like a tide that will 32 A colleague provides a telling 2005 Election Day episode. This colleague, an active member of the Ruling Party, was an election observer, and he describes how his hopes of winning were shattered when he accidently noticed that a member of the Ruling Party and an active organizer had voted for the opposition. The issue came to his attention as the voter had to ask for a replacement card, which election observers had to verify. 99 bring home victory to the Party, without any need for election rigging.”33 The following day, without material incentives, the same crowd, turning out at the opposition rally, chanted their support for the opposition party. The election results, giving the opposition a clean sweep in the capital, proved that the Ruling Party had lost much of its support base. In some precincts, the total vote counts the Ruling Party secured was less than the total number of party loyalists in the same precinct, indicating a potential shift in loyalty had taken place in the voting booth when no one was watching – a clear indication that the incentives and constraints used were utterly inadequate. At a fundamental level, many observers describe the 2005 elections as yet another lost opportunity to develop a sustainable political settlement based on mutual interests and a common vision.34 Opinions vary on why the Party and the nation had become (again) increasingly authoritarian. Some view the “reversal” as a merely continuation of Ethiopia’s violent political culture. The driving factor behind the resurgence of authoritarianism, for Abbink, is the system of patrimonialism, in which power-holders treat the country and politics as their privileged domain. In that sense, Abbink argues, the EPRDF regime is no different than its predecessors as it had established a neo-patrimonial rule, animated by factors such as “resource competition” and unwillingness “to let go of power” (2006, 196). Ethiopia's culture of power inequality might also explain the opposition’s failure to gain a seat in parliament and democratize Ethiopian governance. Others view the “cultural” or the “political’ explanations as too simplistic and call for a thorough examination of voluntary interactions among the parties. Hagmann (2006), for 33 https://www.youtube.com/watch?v=0sNy2lJPc_4 34 The opportunity in 2005 is considered the third lost opportunity after the 1974 revolution and the 1991 transition. 100 instance, worries that there is a risk of falling into a trap of cultural determinism. Without falling into a cultural determinism that “unintentionally excuses” authoritarianism, however, it is essential to learn from history. The political elite, in particular, needed to reflect on why it has repeatedly failed the Ethiopian people. Popular resistance to the Ruling Party’s assault on civil society and Ethiopia’s fledgling democratic institutions is the most significant consequence of the 2005 election. We have seen that the Ruling Party’s approach failed to accord value to a variety of substantive freedoms such as civil liberties. Over the years, the Ruling Party had used several overt and covert means to stifle critical democratic institutions. The Ruling Party had utilized legal and tactical tools that deliberately hindered the development of independent institutions, such as the judiciary and the electoral board (Gudina, 2011). A related unfortunate consequence of the 2005 election is that it reinforced the Ruling Party’s fear of an open and independent society. The Ruling Party did not learn its lesson and after 2005 intensified its assault on civil society, independent media, and other democratic institutions, to avoid the repeat of the 2005 elections. The period saw the enactment of draconian laws aimed at severely restricting the development of democratic institutions. To clamp down on democratic dissent and advocacy; the government passed a series of new laws before the 2010 election. The most repressive new laws included the ‘‘Amended Electoral Law Proclamation’’ (HPR, No. 532/2007), the ‘‘Political Parties Registration Proclamation’’ (HPR, No. 573/2008), the ‘‘Freedom of the Mass Media and Access to Information Proclamation’’ (HPR, No. 590/2008), the ‘‘Anti-Terrorism Law’’ (HPR, No. 652/2009), the ‘‘Registration and Regulation of Charities and Societies Proclamation’’ (CSO Law) (HPR, No. 621/2009) and the ‘‘Electoral Code of Conduct for Political Parties’’ (HPR, No. 101 662/2009). In addition to the enactment of the above draconian laws, the Ruling Party also organized “millions of young vigilantes to use against the opposition” and initiated a massive campaign to increase its membership base (Gudina, 2011, p. 673). Employing as usual material incentives, the Party linked membership to public employment, promotion, and advancement. The Ruling Party also introduced a “one to five” policy in an attempt to get a complete grip on the society. In this policy, each member is to recruit five members, and the five are to engage with each other on a regular basis to ensure “participation.” In reality, the policy was a means of social control, for the members were supposed to report on one another. Simultaneously, the Ruling Party also exerted significant effort to change political rhetoric away from democratization and human development and back to economic growth. The notion of – non-democratic -- developmental state again gained currency, and the Party, as it had done for decades, again boldly exalted party hegemony and the “development first” approach. In 2010, the nation conducted its fourth federal and regional elections, the results of which re-established the one-party state. The election process, in Tronvoll’s (2011) words, was a “huge let-down.” The electorate reacted reluctantly to the election results with deeply worrying levels of apathy, deepening the Ruling Party’s legitimacy gap. This is consistent with earlier descriptions of Ethiopia’s fragile and embryonic democratic experience. (Lyons (2006, p.1) described the Ethiopian experience as a “violent transition” while Abbink (2006, p.173) called it a ‘‘discomfiture of democracy.’’ As far as the Ruling Party is concerned, the nation was on the path to transformation. After putting in place a strong social control system and expanding its membership base, the Ruling Party felt it had everything at its disposal to deepen its developmental agenda. As such, 102 the government introduced a five-year development strategy called “Growth and Transformation Plan” (GTP), which set forth the ambitious structural and transformational objective of turning Ethiopia into a middle-income country. 4.3. The POST 2012 Period: Period of Vulnerability and Contestation The passing of the late Prime Minister Meles Zenawi in 2012 sent shockwaves across the county and beyond. At the same time, the fact that the nation witnessed a smooth transition of power strengthened the Ruling Party’s hegemony. Supporters of the Ruling Party described the turn of events as a strong signal that the Ruling Party had achieved legitimacy and can thus facilitate the development of mutual interests and pockets of efficiency. Alebachew (2012), for instance, argued that pre-and post-2012 developments demonstrate that the Ruling Party had managed to obtain an alignment of social forces within the ambit of revolutionary democracy. Alebachew (2012) lists the 2010 election, the news about the official groundbreaking for the Renaissance Dam, the economic growth story, adverse inflationary experiences, the death of Meles Zenawi and the smooth power transition that followed as major national events that contributed to and benefitted from the alignment of social forces. He then argues that especially the combination the Dam project, continued economic growth and the public’s positive response to trying events like the Zenawi’s death, are all proof of the shift of social forces to support the Ruling Party. Observers praised the Party’s selection of Hailemariam Desalegn as Prime Minister. Hailemnariam is from the minority south rather than northern elites, who traditionally have ruled Ethiopia. These analysts optimistically saw post-2012 events as significant 103 developments that would result in healing the country’s social and ethnic cleavage.35 The Ruling Party’s rhetoric echoed this sentiment. Especially after the 2010 elections, the Ruling Party’s public discourse displays the same conception of itself – “the vanguard party” – that it did when it came to power in 1991. After 2010, however, it adds publicly that it needs fifty years to fulfill its developmental mission. The government now promotes this self-image and the continuity of its decades-long guardianship – through forced training sessions involving civil servants, university lecturers, and students (Mosley, 2015). After 2010, Party leaders often argued that Japan and Sweden show that dominant parties can stay in power for an extended period without narrowing “the political space or posing any negative effect on multi-party system building.”36 The overall sense was that mutual and, even, common interest is emerging and paving the way for the formation of a sustainable political settlement. However, the events that unfolded beginning in 2013 make clear that the country was far from achieving the social alignment that the political settlement the Ruling Party claimed to have forged. Instead the proclaimed settlement – if it ever existed -- had begun to unravel, revealing its shaky grounds. The praise associated with a smooth transfer of power did not last long as signs of profound internal contestations started to emerge as early as 2013. The task of nurturing 35In one such commentary, a strong hope was expressed that Hailemariam’s selection would change the face of Ethiopia’s politics for the better: “The vote has a potential, unlike the arguments by many, to send a strong massage against ethnic politics. Since the power struggle between Amhara and Tigray, and the reservation of the Oromo has a possibility to end because of Hailemariam’s win, there is a chance that the era of a struggle to ethnic superiority eventually comes to an end.” (See http://www.ezega.com/News/NewsDetails.aspx?Page=news&NewsID=3383). 36 EPRDF party official (May 2016 interview). 104 mutual and common interests would be much more complex than the Party imagined. The signs of profound internal contestations began to emerge, then, in 2013. Opinions vary on the critical factors behind the internal contestations. However, one theory is that the Prime Minister Haileamriam Desalegn, who replaced Zenawi in 2012, was ineffective at exerting control of the Party apparatus. Unlike his predecessor, he was – supposedly – weak, timid, and unfit to lead a coalition quite as diverse as was the Party. Another explanation is that the TPLF in an effort to exert indirect control, undermined the Premier and caused a chaotic chain of command. While some suggest that a power struggle between members of the Ruling Coalition took place, others observe that the power within the coalition was getting stronger and on balance more stable.37 The post-2013 period, however, increasingly revealed a new (or renewed) vulnerability in the Ruling Party. In early 2014, Ethiopia experienced a sustained public protest, tantamount to a major political crisis. Many observers traced the post-2014 political turmoil and public protest to the announcement of the infamous "Addis Ababa Master Plan.” The introduction of the Master Plan, which aimed to incorporate around 30 towns and villages in the Oromia region into the capital city Addis Ababa, faced strong opposition. People in Oromia felt the Plan could potentially displace thousands of farmers from their land without adequate compensation and, thereby, further perpetuate the maldistribution of resources. A wave of protests opposing the Master Plan swept across the Oromia region in April and May 2014 and 37 Interview with Party member (May 14, 18, 21, 2016). 105 again from November 2015 into 2016.38 The government eventually agreed to scrap the plan after repeated forceful efforts to contain the public protests failed to yield results. In a clear indication that the root cause of the public’s grievance lay much deeper than the opposition to the Master Plan, the public protests turned into a nationwide movement calling for reform and change. The protest was an expression of the widespread sense of resentment about the unfair distribution of political and economic power and resources. Respondents described the protest as opposing TPLF’s dominance in the political and economic sphere and the related clientelism. In due course, the protests moved to other parts of the country, particularly to the Amhara Region. At the root of the demonstrations in Amhara was a request by representatives from the Welkait Amhara Identity Committee that their alleged land, which was currently administered by the Tigray Regional State, be moved into the neighboring Amhara region. The Welkait Committee argued that the community members identify themselves as ethnic Amharas and no longer wanted to be ruled by Tigrayans. The protesters in Amhara and Oromia began to show solidarity in the form of commitment to a common good and eventually turned the protest into a nationwide movement calling for reform and change. As the public anger increased, a division emerged among the four parties that form the ruling coalition. The Oromo Peoples Democratic Party (OPDO) and the Amhara National 38. For protest related news, see http://www.tadias.com/05/02/2014/deadly-protests-in-ambo-ethiopia-over- plans-to-expand-capital-17-killed/;https://www.hrw.org/news/2014/05/05/ethiopia-brutal-crackdown-protests; http://www.bbc.com/news/world-africa-27251331. It should be noted that during the relatively peaceful interlude in June 2015, the author and two other University of Maryland School of Public Policy faculty members led a group of UMD graduate students in studying Ethiopian development policy. 106 Democratic Movement (ANDM), representing the Oromo and the Amhara (the first and second largest ethnic groups, respectively, in Ethiopia) sensed the extent of the public grievance and started to sympathize with the protestors. These two parties also allied and began to push for significant reform inside the coalition, calling for an end to TPLF’s dominance. Over time, the inter-party rancor became more public, in clear violation of the Party’s assertion of democratic centralism. The division between TPLF and OPDO was particularly profound. Because such public rancor was unheard of within the Ruling Coalition, observers wondered whether the coalition would hold together.39 The protest turned violent on October 2, 2016 following the unfortunate death of many civilians in Bishoftu town. Over a million estimated civilians were in Bishoftu town on that day, celebrating an Oromo cultural festival called Irrecha. When the public expressed its opposition to the government, security forces fired tear gas and live bullets, leading to a stampede that resulted in the death of many people. Angry young people reacted and began to attack political and economic institutions. The government immediately declared a state of emergency, which helped defuse the protests. To respond to the deep public discontent, the government introduced a series of unsuccessful reforms, including changing farmers’ compensation schemes during land transfers and reshuffling the cabinet in a way that focused on more balanced ethnic representation. As the public opposition intensified, the government also established a revolving fund for youth to help create job opportunities. Hoping the money spent through the youth fund would calm the youth and stabilize the security situation, the government decided to lift the state of 39 See for instance. https://www.opride.com/2017/11/11/ethiopia-is-opdo-the-new-opposition-party-an-appraisal/ 107 emergency in August 2017. However, after the lifting of the state of emergency, sporadic protests continued in many parts of the country, demanding deeper reforms. As the protest intensified and reached many parts of the country, the government was forced to introduce another state of emergency. The demand for change was so profound that the government was unable to contain it by force. Eventually, the Ruling Party had to give up after all forceful means had failed to contain – let alone subdue – the public anger. In April 2018, the Ruling Party had no choice but to change its leadership. This momentous decision ushered in an unprecedented wave of reform and optimism across the nation and abroad.40 Most observers agree that the wind of change that blew through Ethiopia was unexpected. The probability that TPLF’s would give up power was slim. However, as Khan (2010) rightly observes, the outcomes of conflicts depends on relative power rather than absolute power. Despite its control over the means of violence and the ability to provide incentives for citizen support, TPLF was not able to sustainability hold onto power. What is certain is that a definition of power and its distribution based merely on the configuration of clientelistic political organization is inadequate to explain recent developments in Ethiopia. Had incentives and constraints been sufficient to influence the outcome, the effort by the ruling coalition to calm down or co-opt dissent through the introduction of improved compensation to the farmers and the establishment of the youth funds would have resolved – or at least have begun to resolve – the crisis in Ethiopia. In reality, what led to the positive turn of events in Ethiopia’s case is the attention accorded to the relative political and moral power of concerned citizens. Incentives and constraints alone are inadequate to help develop mutual interest and effectively implement 40 Professor David A. Crocker, a co-director of this dissertation, reports the uniformly optimistic and even euphoric reaction – to political changes in their home country – of Ethiopian taxi drivers, clerks, and parking attendants throughout the Washington DC region. 108 industrial policy. Due attention must be given to the notions of fairness and equity, citizen’s rights, civil society, and institutions, among others. We will return to this issue in Chapter six, after discussing Ethiopian state-business relations in the next chapter. 109 CHAPTER FIVE STATE BUSINESS RELATIONS Just as in other African countries, Ethiopia's domestic capitalist class is quite small and has limited capacity for capitalistic activity. With the Dergue having significantly weakened an erstwhile burgeoning capitalist class, today's Ethiopian capitalists emerged as a narrow and shallow base in 1991. Thus, before one can effectively evaluate the political influence and technological capability of these capitalists, vis-à-vis the particular industries under consideration, we should have a firm understanding of the broader context of Ethiopia's state- business relations (SBR). Such understanding forms a solid basis to evaluate how different configurations of clientelist political organizations have affected the emergence of the third and last necessary Whitfieldian condition, namely, “learning for productivity.” By learning for productivity, Whitfield et al.’s focus is whether or not, the domestic capitalists in the economy were able to adopt new and improved technologies and technological processes that would enable them to be more productive. As the variations in different configurations of clientelist politics in different periods have been presented in the previous chapter, it will not be repeated now. Instead, the focus of the analysis will be on describing why learning for productivity failed to emerge. To this end, I will first present the approach the Ruling Party adopted in the formative years. Next, I will discuss the nature of state-business relations and its impact on industrial policy outcomes. Finally, I will present and evaluate a recent institutional effort aimed at improving state-business relations. 110 5.1. Formative Years Although not unique, Ethiopia's state-business relations refer to the symbiotic relationship between the government (public sector) and the private sector. Determined by the way the state and businesses interact in a given economy, SBRs take on different forms and shapes. As Leftwich (2009) notes, SBR forms vary significantly, ranging from formal, regular co-ordination arrangements, to informal, ad hoc interactions. In Ethiopia's particular case, the SBRs that have emerged in post-1991 Ethiopia (concerning both formal and informal relations) are reflective of the ideological orientation of the Ruling Party, EPRDF. As mentioned earlier, under the slogan of “revolutionary democracy,” to achieve its developmental objectives, the Ruling Party sought to build a new type of developmental coalition and create a political economy conducive to development. The fundamental problem lies, however, in how the Ruling Party constructed such an alliance and the manner in which the developmental coalition came to be. From the get-go, the Ruling Party adopted an exclusionary approach in the coalition they sought to establish, identifying specific groups as fit and others as unfit to be part of it. Specifically, it categorically excluded the domestic capitalists. Zenawi (unpublished, p. 12) writes: “It is not difficult, based on our analysis so far, to identify who the candidates of such a coalition can be. One group that cannot be part of the coalition is the private sector.” The lack of comparative advantage in productive sectors in developing countries like Ethiopia, the argument went, has forced the private sector to engage in non-productive rent- seeking activities that add little or no value creation. The private sector, therefore, was perceived as potentially hindering the state from achieving its developmental mission. In Party and government rhetoric, particularly in the earlier years of the regime, the private sector was described as weak, unproductive and rent seeking, 111 able neither to create value nor accumulate technological capacity needed for economic transformation. De Wall (2012, p.153) quotes Zenawi as having said “in these circumstances (of poor comparative advantage), the best way to make money is through rent: natural resource rent, aid rent, policy rent. So, the private sector will be rent-seeking not value creating, it will go for the easy way and make money through rent.” Some wonder whether the Marxist-Leninist theory influences this attitude towards the private sector. It is the case that Zenawi and other key Ethiopian leaders had imbibed a robust communist ideology from their student days in the 1960’s and early 1970’s. The TPLF, a leading member of the ruling collation, had taken a standard leftist line, including top-down regulation of trade and moneylending, when it administered areas under its control during the civil war. Such control involved working with and directing the local petit bourgeoisie in the villages and small towns (De Wall, 2012). Since the TPLF publicly abandoned its Marxist program when it came to power, it is plausible that after years of having been in power, today’s Ruling Coalition has transcended its left-leaning ideology. The debates among party leaders in the early 2000’s, following the significant rift within the Party however, raise questions as to the extent to which Marxist- Leninist influences remain. One group even accused another group of succumbing to imperialism. Moreover, during the internal party debates, there were surprisingly references to Marxist epithets such as “Bonapartism” and the “Kulak line” (De Wall, 2012, p.151). 5.2. The Nature of State-Business Relations Ideological issues aside, it is hard to dispute that the general environment between the private sector and the government in Ethiopia is full of mutual suspicion, which hinders the private sector from playing an active role in the national development project. As Oqubay (2015, 112 p. 77) admits, the mutual suspicion and mistrust have created an obstacle to creating a long- lasting and beneficial state-business relationship. Such thinking has shaped the mindset of the private sector and has resulted in significant negative repercussions on the state-business relations in Ethiopia. Despite some improvements in the last few years, an environment of mutual mistrust and suspicion generally continues to characterize this relationship. Hence, creating an effective and long-lasting state-business relationship has proved to be difficult in Ethiopia (Oquabay, 2015). Evidence abounds on the precarious nature of this relationship, and we submit now evidence from the planning exercise and the regulatory regime as well as evidence that the nation lost an opportunity to exploit the full potential of the private sector. Designing, formulating and implementing IP in Ethiopia typically has been a top-down process. That is because there has been a clear link between Ethiopia's industrial policy and the hierarchical Ruling Party. Veteran Party members recall the use of a white paper on industrialization that was used for indoctrination and training within the Party. This white paper, as is wont to happen in one-party rule, filtered into the civil service and academic institutions (Oqubay, 2015). As a mastermind of the Ethiopian developmental state, Zenawi is believed to have written most of the document and the subsequent policy documents.41 Subsequently, the preparation of successive national development plans has also primarily been a State- and Party- driven process. The involvement of the private sector did vary from one planning period to another and consequently lacking uniformity, consistency, and predictability. Even though some of the planning efforts saw better participation by the private sector than did others, the general 41 Two veteran party officials have confirmed this conjecture: Interviews (May 2016). 113 tendency was for the government to prepare a plan and only then to invite the private sector for “consultations.” These interactions, however, were little more than rituals for the private sector ceremonially to consent to completed plans. The “consultative forums” were used to create awareness and garner public blessing rather than solicit inputs – let alone deliberate together (Crocker, 2008). Such shallow or thin consultations could be the reason why the first edition of the Growth and Transformation Plan (2010-2015) lacked a clear private sector focus. It failed to articulate the role of the private sector going beyond a mere boiler plate reference that it is an “engine of growth.” Overall, a careful reading of the Ethiopian development and IP discourse reveals that the private sector has not been considered an integral part of the developmental coalition. The overriding focus on the rural economy meant little or no regard for the urban class and the private sector. As mentioned above, especially in the early days, there was a clear bias against the private sector both in policy discourses and in practice. The state was expected to dismantle the patronage network in the rural area with the objective of establishing a solid developmental base in the rural areas. Bekele et al. (2016) provide a fascinating insight as to why the Ruling Party preferred to build up the state machinery using the rural elite instead of its urban counterpart. The EPDRF Party set itself against the urban elite’s opposition to both the Party’s idea of cultural pluralism and the Party’s ethnicity-based political settlement. The Party was also at odds with the urban elite’s desire to deconstruct the notion of statehood based on pan-Ethiopianism. In contrast to the urban elite, the rural elite – using the political spaces provided by EPRDF – was able to organize various political parties and mobilized the rural masses under different ethnicity-orientated organizations. As a result, the 114 influence of the urban elite diminished gradually, and many of this elite emigrated en masse to western countries and formed the backbone of the Diaspora community known for its decades- long contesting of the Ethiopian State (Abbink, 2011; Bekele et al., 2016). Significantly, the Ruling Party continued to denigrate the private sector as weak and unproductive, motivated solely by individual and group self-interest or rent seeking. According to the EPRDF, as discussed above, the private sector is unable to either create value, accumulate technological capacity, or bring about economic transformation. In the earlier years when the Ruling Coalition took power, the rhetoric has been even more hostile to the private sector. As we will show soon, in this “climate of opinion” it was impossible for the private sector to develop technological capabilities. The regulatory regime also displays the problematic nature of state-business relations. The regulatory environment is overly cumbersome, which arguably is a result of the prevailing political climate suspicious of the private sector. The general mindset in the bureaucracy tends to focus on policing its operators rather than facilitating their business. The regulatory environment is complicated and unfriendly – inimical, even – to the private sector. There are, for instance over 1,320 license categories under the Ministry of Trade, according to a 2014 study that reviewed the licensing regime in Ethiopia (BKP, 2014). Out of step with international best practices, Ethiopian businesses in Ethiopia are being required to obtain multiple and redundant licenses for similarly related activities. The business-licensing regime in Ethiopia is unduly prescriptive and requires licenses both too specific and too numerous. The excessive number of regulatory hurdles makes the process of starting a business prohibitively onerous. Take the case of required competency certifications, whose importance and effectiveness in any case are highly questionable. Although the situation has improved 115 lately, a simple act of registering trade names is so complicated that businesses have had to wait for weeks to get their names registered. Such requirements are often an opportunity for corrupt practices, such as “speed” corruption, rather than as a means of protecting the public interest. Many businesses also complain about lack of transparency and accountability in the regulatory regime. Members of the private sector lament that they have no say in how their companies are regulated, because effective consultations between the government and private sector actors are non-existent. In the absence of such discussions, regulations when enacted tend to deviate from the regulatory legislation and run into serious implementation challenges. Moreover, given the lack of coordination in the bureaucracy, businesses often contend with contradictory requirements from different government agencies. Domestic capitalists interviewed for this study also identify the Ruling Party’s affiliated businesses as another significant brake on the domestic private sector’s development of technological capabilities.42 Each of the four members of the Ruling Coalitions have endowment funds and own and their own businesses. Operating under an umbrella company called EFFORT, TPLF, the dominant member of the coalition, owns enterprises in such key economic spheres as banking, insurance, import and export, media and communication, construction, agribusiness and mining, among others. Plagued by controversies such as the source of its initial funding, EFFORT is infamous in Ethiopia because critics insist that the company receives favorable treatment from the government. Unlike private enterprises, EFFORT allegedly has had unfettered access to federally-backed loans and guarantees (see Altenburg, 2010). Others, on the other hand, argue 42 Interview (May 2016; March 2018; September 2018). 116 that here is no evidence that the private sector is being crowded out or treated unfairly. Vaughan and Gebremichael (2011, p. 59), for instance, claim that EFFORT-owned companies played a role in financing investment in areas of weak private involvement and also made “important contributions to the slender commercial tax-base of Tigray Region, to job creation, and manufacturing capacity.” Regardless of which side wins this debate, it is clear that the Ruling Party’s strategy of using endowments to advance its industrial policy reflects its deep distrust of domestic capitalists. Its Party-owned businesses provide the Ruling Party the opportunity to exercise tight control over critical aspects of the economy. A weak domestic capitalism poses scant risks to the Ruling Party, for the ruling elite has its abundant and reliable source of finance. This strategy worked for most of the 1990’s and early 2000’s. However, as the ruling elite’s real and perceived unfair practices increased, the resentment against the ruling elite continued to mount and showed signs of the elite’s vulnerability. In a run-up to the 2005 election, domestic capitalists began to oppose the regime in an organized manner, using, for instance, the Chambers of Commerce as a platform. The leadership of the Chamber mobilized resources from the business community in support of the opposition parties. Although these efforts failed, they further strained the state- business relations in the aftermath of the 2005 elections. Once it had reestablished its grip on power, the Ruling Party increased its assault on the business community. According to a former leader of the Chamber, in order deliberately to undermine and weaken the Chamber, the Ruling Party facilitated the establishment of parallel association dubbed “the Renaissance Business Association.”43 A politically motivated rhetoric on “rent-seeking” targeted businessmen who had supported the opposition during the 2005 elections. With the exception of a short-lived State 43 Interview (May 2016). 117 led effort to improve state-business relations between 2010 and 2013 (see section 5.3 below), by and large, the state-business relations in Ethiopia have been in a precarious situation. The domestic capitalist was able neither to have significant political influence nor to learn to be productive. 5.3. Industrial Policy Outcomes 1995-2012 In this section, I present the outcomes of Ethiopia’s IP focusing on the period between 1995 and 2012.44 This period is selected because as per the Whitfieldian model, this is a period of domination, which should have been conducive to the emergence of the third condition -- learning for productivity – allegedly necessary for good policy outcomes. The Ethiopian economy registered remarkable growth during this period. Overall GDP grew eight-fold between 1995 and 2012. However, when evaluated against the critical objectives of the industrial policy, the policy outcomes have been unsatisfactory. Recall that the primary goal of Ethiopia's IP has been and continues to be to alter the structural characteristics of the economy from low productivity to high-productivity as a means to achieve the goal of human well-being. The IP also has set sector-specific goals for the priority sectors identified in the policy. Measured against the ultimate objectives and sector-specific results, policy outcomes during the period under consideration were not satisfactory. With respect to changes in the structural characteristics of the economy, recall that IP 44According to Whitfield et al.'s framework, it is highly unlikely that industrial policy will have had good outcomes during the first (1991-1995) and the third (2013-preesnt) periods. The former was a period of vulnerability while the latter was a period of vulnerability and contestation. In this respect, the declining trend in several macroeconomic indicators during the post 2013 period is not surprising. 118 refers to the role the government plays in an economy with the deliberate aim of such structural transformation. The very term “structural transformation” implies at a minimum the gradual increase in the share of industry (and mainly the manufacturing sector) in overall GDP. In Ethiopia’s case as well, achieving structural transformation of the economy has been the central focus of the IP. As the following graph shows, even though the share of agriculture has declined over the years, the percentage of manufacturing in total GDP has remained constant at 5 percent (World Bank, 2016). The graph below is a powerful illustration of the poor IP outcomes. Despite years of rhetoric on structural transformation, the share of manufacturing has remained flat.45 45 Recall that an increase in the share of manufacturing in total GDP has been singled out as a key indicator of successful transformation. Manufacturing is different from the industry sector in general as industry comprises several activities such as mining , construction( and also manufacturing). 119 Figure 5.1: Composition of GDP (1980-2015) Tellingly, the export performance has been erratic. The post-2005 period is particularly striking. Even though the post-2005 period was a period that saw increased rhetoric of ideological developmentalism, the share of export to GDP has consistently been declining during the post-2005 period (see figure 5.2 below). 120 Figure 5.2: Ethiopia’s Export Performance and Competiveness Index Ethiopia-Competitiveness Index and Export Performance 300 20 E 18 x 250 16 p o 200 14 r G 12 t D 150 10 P 8 % 100 6 o 50 4 f 2 0 0 198919911993199519971999200120032005200720092011201320152017 REER X/GDP Source: National Planning Commission With respect to sector-specific goals, given that the textile and garment sector as well as the leather sector were singled out as the two most important sectors in Ethiopia's IP (especially in the earlier years), we now examine the performance of these two priority sectors. As the charts below show, even though income from textile and leather products' export has increased over the years, compared in relation to set targets, export performance has been consistently low. In three consecutive national development plans (2004/05 to 2017/18), export performance was only 23.7 percent of the target (see figure below). 121 Figure 5.3. Production and Export Performance (Textile and Garment) Similarly, the leather and leather products industry had shown abysmal performance. Average performance, between 2004/05 and 2017/18, covering the three consecutive plan periods, was only 21.64 percent (See figure 5.4). Figure 5.4. Production and Export Performance (Leather and Leather Products) 3000 Production and Export Performance 2500 (Leather and Leather Products Industry) 2000 1500 Export Target (USD) 1000 Export Actual (USD) 500 Value Added Actual (Birr) 0 06 07 08 09 10 11 12 13 14 15 16 70 0 0 1 1 8 2 2 2 20 20 20 20 20 20 20 20 20 20 The performance of the two top priority sectors is disappointing given the amount of resources spent and the priority support accorded to these sectors. The incentives provided include access to cheap land, low-interest loans, tax holidays, duty-free importation of machinery and accessories, infrastructure development, and several handholding services in production and 122 Currency in Millione merchandising techniques and marketing supports, among others.46 The analysis presented above demonstrates the limitations of Whitfield et al.’s framework. The weak industrial policy outcome is puzzling, for the model specifies that the period under consideration should have been ideal for the emergence of the three conditions that Whitfield et al. argue are necessary for successful implementation of industrial policy. Given the relatively weak power contestation both within and outside the Ruling Coalition, the configuration of the clientelist politics was “appropriate” for the emergence of the three Whitfieldian necessary conditions and hence, for a successful industrial policy outcome. Yet such success did not occur. Why not? The core of the problem, I argue, concerns the insufficiency of self-interested incentives and constraints and the related inadequacy of a political economy analysis based on this theory of motivation and the related exclusively rent-seeking clientelist political organizations.47 The Whitfieldian model mistakenly focuses only on two dimensions: the relative power within and outside the Ruling Coalition and the relative power of domestic capitalists vis-à-vis ruling elites and the technological capabilities of those capitalists. A fuller and more adequate account includes a third dimension, namely, the relative political and moral power of concerned citizens. Industry policy can be successful only when the process aspect, as Sen understands it, is right. When considering notions of fairness and equity, citizen rights, civil society, and institutions, 46 The amount of incentives the Ethiopian government provides to investors including those in the textile sector is enormous. According to a recent study by the Ministry of Finance and Economic Cooperation (MoFEC), the overall incentive may amount to 6% of GDP. Given the overall poor performance of the priority sectors, it would be prudent to question whether the investment concerning excessive incentives has been beneficial for the nation. 47 The Whitfieldian conditions are offered as necessary but not sufficient for IP success. This essay seeks to identify another condition the achievement of which increases the likelihood of IP success. 123 among others, there is a better chance for the other necessary conditions to emerge relatively quickly and for the combination likely to be successful. Critics of Ethiopia’s IP argue that the overall poor performance of the priority sectors, despite continued government investment for more than two decades, is a good indicator that the Ethiopian government has not been able to pick winners. Specifically, critics have singled out the top-down approach of identifying priority sectors as a critical factor in Ethiopia's failures. The procedural limitations notwithstanding, it is difficult to argue that the prioritization of the textile and garment sector in Ethiopia’s IP was necessarily a mistake. Endowed with sizeable arable land and an abundant, trainable and inexpensive labor resource, Ethiopia had and has a comparative advantage to develop a labor-intensive light manufacturing industry. Probably more than sector type, the process of sector selection and the overall political economy issues help explain the poor performance. As discussed earlier, the Ruling Party adopted an approach that excluded the domestic capitalist from the developmental coalition it sought to establish. The result was a political economy that infused mutual suspicion. The process of formulating and implementing IP has, typically, followed a top-down approach. As such, the process lacked the dynamism – which public-private collaboration and civic deliberation occasions – to learn from mistakes and make timely improvements. In the case of the textile and garment sector, for instance, critics argue that the government had mistakenly prioritized the garment sub-sector before the textile sector was effectively developed. A senior manager of one of the sectoral associations at the Ethiopian Chamber of Commerce, for instance, argues that the primary reason for poor performance of the textile and garment sector is its misguided top-down approach of encouraging investment in the upstream of 124 the value chain, which is the apparel sub-sector. The apparel sub-sector, the argument goes, cannot be competitive enough unless there is a strong textile sub-sector that can meet the demands of the apparel sub-sector in quantity, quality, and variety of fabric. This example highlights the critical importance of what Sen calls the process aspect of development. Had there been close cooperation, give and take, and coordination between the government and the private sector, reversal or repair of earlier strategic miscalculations on sub-sector prioritization would have been swifter. The overwhelming emphasis on material incentives and constraints, owing to the prevailing political economy, has also severely limited the effectiveness of the policy instruments. As mentioned earlier, the government has been providing direct and indirect targeted supports to develop the priority sectors identified in its industrial policy. The incentives were part of the government’s strategy to accept but shape the rent-seeking political economy towards productivity-enhancing political economy. The State did so by using productive rent allocation as a critical instrument.48 Such an approach is informed by the prevailing view of economic man -- Homo economicus – which assumes that individuals are entirely self-interested and amoral. The architects of the policy assumed that the fundamental structure of the economy was full of nothing but rent-seeking behavior and State intervention could do no more than ameliorate or overcome the negative consequences of the rent-seeking political economy. The government used incentives as part of its strategy of altering the rent-seeking political economy towards 48 By productive rent allocation, I am referring to the effort by the government to use incentives and constraints to get business to engage in sectors that the government deemed are productive. 125 productivity-enhancing political economy. However, as Bowles (2016) argues, no matter how cleverly designed, incentives alone cannot provide the foundation for good governance. The government’s misguided assumption -- that it can dismantle the rent-seeking political economy by “productively” managing rents -- had proved to be a failure. Rather than helping promote productivity and competitiveness, the many incentives the government provided ended up creating a growing desire for more and more incentives. For instance, as a former tax official notes, after enjoying 5-7 years of a tax holiday, it was commonplace to see firms reporting “loss” to avoid paying taxes.49 With its excessive focus on material incentives, the government ended up creating a parasitic private sector that devours rents rather than learning to be productive and competitive. As documented in the previous chapter, contrary to its expressed primary goal of dismantling rent-seeking political economy, the Ethiopian State ended up becoming a hotbed of a pervasive rent-seeking, namely, clientelism.50 The frustration with the domestic private sector’s inability to learn how to be productive might have forced the government to focus on attracting FDI to develop the priority sectors. 49 Interview (March 12, 2018). 50 For evidence on the pervasiveness of clientelism, see a 2017 corruption report (Plummer, 2012); US Department of State (2017); and Transparency International (2014), among others. According to these reports, corrupt practices are observed in many facets of the society including the police, the judiciary, public offices, land administration, tax administration, public procurement, and even national resources management. A US State Department Report (2017) shows that businesses do not have full confidence in the police services to protect them as corruption within Ethiopia’s police is perceived to be rampant. There is also evidence that companies face high risk of corruption in Ethiopia’s pubic services provision. Petty corruption and solicitations of bribes in return for the processing of documents are the most common forms of corruption. A high risk of corruption is also reported in connection with tax and customs administration and also in public procurement. As property rights are insufficiently protected and there is lack of clear polices and laws, there is also a high risk of corruption in Ethiopia’s land administration. Companies also reportedly face a high risk of corruption when dealing with Ethiopian Judiciary (Transparency International, 2014; Plummer, 2012; and US Department of State, 2017). 126 Indeed, the late PM Meles Zenawi spearheaded the effort to attract FDI and focused on investors from Turkey and China. One crucial investment from Turkey was a company called Ayka Addis. The first fully integrated, state of the art textile plant in Ethiopia, covered a 150,000-square meter area and became operational in 2010. The company could only manage to declare successful results for the first two years, but in that start up period it impressively accounted for more than half of the annual export revenue from the textile sector. Yet, after 2014, the Company declared losses and is currently at loggerheads with its financier, Development Bank of Ethiopia (DBE). The company owes DBE 2.3 billion ETB (roughly 85.2 million USD).51 A senior official at DBE argues that describing the Ayka investment as FDI, is a misnomer, for DBE financed the project. He further contends that there is a strong probability that the owners of Ayka had made money back in 2010 by overstating the value of the machinery and equipment that they imported. This example demonstrates that incentives alone do not provide an adequate basis for a practical implementation of industrial policies and that appealing to self-interest may lead to corruption. Those who receive incentives, as the example of this factory Ayka shows, may be encouraged to cheat and gain even more rather than putting the resource to socially productive uses. The irony is all too obvious: an industrial policy that aspires to transform a political economy from rent-seeking to productive activities ends up accentuating rent-seeking activities. The most troubling part is that the government denied itself the opportunity to correct mistakes, for there was no reliable and critical mechanism to evaluate the effectiveness of policies, strategies, and programs. Driven by the “development first” approach, the government 51 Interview (September 14, 2018). 127 continued to make considerable investment in several mega infrastructural projects including industrial parks, energy, and railway projects. The government also embarked on several significant investments including several sugar and fertilizer factories. A government-owned military parastatal called Metals and Engineering Corporation (METEC) received most of these projects. These projects have not only become the source of major corruption, inefficiency, and waste but have also created a substantial fiscal and debt burden, putting the country on the brink of financial and economic crisis. Compared to its peers, Ethiopia has the worst public investment management record. A 2017 study finds, projects in Ethiopia had a 58 percent time overrun and 130 percent cost overrun compared to countries like Kenya, South Africa and Vietnam (NPC, 2017).52 Another study by Ethiopia’s Ministry of Public Enterprises on three sample sugar projects shows that these projects had a total cost overrun of 11.3 billion ETB (approximately 1.2 billion USD). Similarly, a single fertilizer factory project had a 5 billion-birr (185.2 Million USD) cost overrun. As the government used external borrowing to finance these projects, the country’s total debt stock had ballooned to USD 24 billion in 2017. According to a review by the Ministry of Finance, as of December 2018, METEC has had about 1.5 billion USD loss or embezzlement that is unaccounted for while the Sugar Corporation has an outstanding loan of close to 2 billion USD, with no substantial results to show for it. Again, the critical question is how the country got into this situation. Several respondents agree that the absence of transparency and accountability can be singled out as the most critical 52 Data from Germany was also included in the analysis. As Germany cannot be a good comparison, I have omitted it form the comparisons. The project survey covered 60 projects over the course of five years (FY 2011/12 to FY2015/16 ). 128 factor. For instance, because METEC was a powerful military organization –dominant in the Ruling Coalition – it was almost impossible to question anything the firm did. A former employee of Ethiopian Sugar Corporation described the agony of helplessly witnessing “the waste and daylight robbery of public resources”53 on a daily basis. This same respondent was labeled “anti-development” for raising the need for transparency and had to resign from his job. Proponents of the Ethiopian Developmental State model worry that the excessive focus on the kind of waste mentioned in the above paragraphs might overshadow the overall success of Ethiopia’s developmental state experience. Pointing to the overall result regarding GDP growth, they prefer to downplay the failure of several mega projects describing them as good intentions gone wrong. Due to overzealousness to realize its developmental goals, the argument goes, the government mistakenly embarked on several mega projects at the same time, leading to poor execution and inefficiency. What is obvious is that the government has got the “process aspect” of development entirely wrong with the result that the “opportunity aspect,” the good consequences aspect, also has suffered. The top-down approach, which left little to no room for meaningful consultations coupled with the suppression of freedom of dissent, created an environment whereby citizens are afraid of questioning the actions of the government. The resultant lack of transparency and accountability has led to a significant abuse of power, embezzlement, and waste of resources. The appalling result has been poor policy outcomes. In summary, political economy analysis based on mere configurations of a clientelist political organization cannot adequately explain the variations in IP results. The Whitfield 53 Interview(March 2, 2018). 129 framework neither provides a complete interpretation nor a consistent explanation of developments over different periods of IP study. Notably, the framework fails to explain why necessary conditions failed adequately to emerge under what would have been an appropriate configuration of a clientelist political organization. Moreover, the framework fails to provide the factor of civic participation whose role would have contributed to the Whitfieldian conditions and together with them would have made IP success more likely. Lost Opportunities Measuring the cost of the Ethiopian government’s approach to development should not only be measured in poor policy terms but also in the opportunities lost. Naturally, measuring lost opportunities is a difficult undertaking as it involves contrary-to-fact thinking and some element of subjectivity. In Ethiopia’s IP experience, there is enough evidence that shows the nation squandered many opportunities due to its failure to forge a meaningful partnership with the private sector. Owing to the ideology of revolutionary democracy that specifically excluded the private sector from the developmental coalition, the industrial policymaking and implementation process in Ethiopia had been too state-centric. Despite some recent efforts to improve state-business relations (see section 6.2 below), the Ethiopian IP experience has not evolved over the years in line with the new thinking on IP. As discussed earlier, the new understanding of industrial policy emphasizes a strategic collaboration between the private sector and the government to advance a nation's bid for economic transformation. The new thinking is that IP is more of a social search process in which the government interacts with the private and civil sectors to identify the key constraints facing domestic firms and overcome them as opposed to its ability to develop and implement “appropriate” policies. 130 The new thinking has a significantly different approach as it does not only recognize that the government cannot have enough information about the market failures that constrain industrial development, but it also leaves room to learn from mistakes and revise priorities. In Ethiopia’s case, the policy-making process invariably followed a top-down approach. The government had attempted to “pick winners” by identifying priority sectors in its industrial policy and strategy. Given the poor performance of the priority sectors, as documented above, Ethiopia’s experience is prone to criticism by opponents of IP that the state does not have sufficient information or the capability to “pick winners.” The government’s failure to engage in a strategic collaboration with the private sector had severely limited its ability to learn about constraints, costs, and opportunities firms face in the economy and jointly overcome them. Due to lack of what Rodrik (2004) calls strategic dialogic collaboration between the private sector and the government, the nation has missed the opportunity to apply the imperfections learned from one occasion to play a useful role in another situation (Hausmann and Rodrik 2003; Rodrik, 2004). Of equal importance, the top-down dogmatic policy has inhibited or at least severely limited the discovery of new possibilities. Given the excessive emphasis placed on a few priority sectors, the industrial policy framework has not provided room to explore new possibilities. With the Ethiopian government expending significant resources on identified priority sectors, one could point to the lack of a mechanism or a process for determining why the country has, thus far, failed in sufficiently exploring product spaces and diversifying its export base. Primarily, because Ethiopia’s IP does not facilitate the private sector to investigate what might have been and what could be produced competitively, the country has lost the opportunity to discover new opportunities. Such a search and collaborative process stimulates the emergence of unforeseen development trajectories (UNCTAD, 2015). The government can encourage this discovery 131 process through targeted interventions. Current incentives are by and large sector-specific and fail to encourage the discovery of new possibilities. As an exercise by the Center for International Development at Harvard University shows, Ethiopia has not fully explored its potential. Had there been a dynamic search process in Ethiopia’s IP, the country could have produced and exported products like medical instruments, electric boards, and so forth (see Figure 5.5 below). These products, however, do not appear on Ethiopia’s export baskets and signify a lost opportunity. Figure 5.5. New possibilities in Ethiopia’s Product Space Source: Atlas of Economic Complexity: Center for International Development at Harvard University The government’s banking sector is an excellent example in this regard. As a means to mobilize financial resources and direct them towards priority sectors, the government has inadvertently blocked off the space for the private sector to discover new possibilities. As a senior staff at the Ethiopian Intellectual Property Office (EIPO) notes, the EIPO had to shelve 132 some potential creative ideas because of insufficient bandwidth to finance them.54 Notwithstanding the limited shift in the structure of the economy, Ethiopia’s success regarding overall GDP growth is remarkable by any measure. Over the last two decades, Ethiopia’s GDP has grown tenfold increasing from 8 billion in 1999 to 80 billion in 2017. The challenge, however, is that massive public investment drives most of Ethiopia's growth. According to the World Bank (2013), Ethiopia has the third-highest ratio of public investment to GDP in the world. The sustainability of such massive public investment is highly questionable as there is no commensurate growth of the domestic private sector. The private sector remains weak and fragmented, and the public sector is visibly dominant in the economy. There are legitimate concerns that state intervention in Ethiopia is resulting in the crowding out of the private sector (World Bank, 2015). In addition to the dominance of the public sector in the Ethiopian economy, critics also argue that the Ethiopian government has unduly favored foreign investors over the domestic capitalists. This perception is widespread as almost all domestic capitalists interviewed for this study subscribe to this view. The complaint revolves around the incentive package provided to foreign investors. In recent years, the government’s ambitious industrial park project has been at the center of this controversy. The government resorted to an ambitious industrial parks development program as a way to turn Ethiopia into Africa's manufacturing hub. As indicated in the Growth and Transformation Plan II (2015-2020), the government plans to generate 2 million jobs and significantly increase the contribution of manufacturing to overall GDP. 54 Interview(May 2016). 133 The flagship project, Hawassa Industrial Park (HIP), was inaugurated on July 13, 2016. As Mihertu and Llobert (2017) document, the partnership with global industry leader, PVH,55 has made the HIP project – apparently – a great success. The government expects to generate close to 60,000 jobs and US$1 billion in export revenues from the HIP. Three other parks in Mekelle, Kombolcha and Adama have been inaugurated since then. The industrial parks project, however, has been controversial from the outset. The project was approved only after year-long “thorny and divisive” (Mihertu and Llobert, 2017, p. 27) discussions within the government. Controversial issues include the return on investment, for building the park requires an enormous amount of resources (Ibid). The belief is common and credible that the excessive emphasis on FDI comes at the expense of failure to support the growth of the domestic capitalists. Moreover, the argument that the agriculture sector is neglected is due to the excessive emphasis on the manufacturing sector. Two years after the inauguration, the controversy remains as export revenue, and employment targets have not been met. Besides, the country’s debt burden has increased and this fact creates serious external sector challenges. It is too early to tell whether the industrial parks project will be a success, partial success or a failure. What is certain is that the country itself will not be able to realize meaningful structural transformation since the project’s focus is almost exclusively on FDI. As Whitfield et al. (2015) note, though it might be possible to achieve some IP objectives through FDI, it is impossible to realize fundamental transformation objectives. Experiences of successful developmental states in East Asia show that as interventionist 55 PVH is an American Apparel firm. PVH stands for Philips –Van-Hausen. 134 as they were, they paid – unlike Ethiopia – serious attention to the growth of the domestic private sector. For instance, the provision of credit to the private sector was much higher in Korea compared to Ethiopia. Private sector credit to GDP averaged around 30 per cent in Korea in the 1970s compared to about 20 per cent in contemporary Ethiopia. A 2015 World Bank study finds that Ethiopia’s income level would have been much higher had it managed to provide more credit to the private sector (World Bank, 2015). The marginal product of private investment is higher than the public investment; in 2001 the former was 22.5 percent and the latter was only 7.5 percent (World Bank, 2015). Hence, increased participation of the private sector in the economy is likely to have a potential to lead to higher economic growth. Ensuring the sustainability of the development project in Ethiopia requires transforming the nature of the state-business relationship. Such transformation demands a complete change in mindset for the Ruling Party needs to reexamine its views on how an effective and sustainable developmental coalition can be established. The private sector should not only be an indispensable part of this coalition. It is a critical engine of growth. Failure to genuinely appreciate this point and ensure the efficient functioning of the engine could potentially upset the entire development project. In a sign of recognition for the need to establish effective state-business relations and a meritocratic bureaucracy, Ethiopia to its credit did attempt to establish an institutional mechanism to help improve state-business relations. In the following section, I will present and evaluate this recent effort -- a public and private dialogue platform. 5.4. The Ethiopian Public Private Consultative Forum (EPPCF) Dubbed the Ethiopian Public Private Consultative Forum (EPPCF), the platform aimed at facilitating policy collaboration between the government and the private sector. My evaluation 135 focuses on the normative character and effectiveness of the platform. I assess the EPPCF’s structure, processes, and results, using Crocker’s (2008, 2010, 2012, 2013, and forthcoming) five dimensions of democracy. These five dimensions, used to evaluate the democratic nature of a system or set of practices are breadth, range, depth, separation of powers, and control. The “breadth” dimension helps us answer the “who” question: who “rules?” Crocker explains the “who” dimension using the Athenian example. Crocker argues that democracy in ancient Athens and the early US was narrow as women, immigrants, the landless, and slaves were not considered citizens and were not allowed to participate in democratic practices. In our case, the breadth dimension helps us answer to what extent the EPPCF mechanism has been inclusive, regarding the participation of the key stakeholders. The “range” dimension focuses on the scope of questions that the people decide on and the institutions in which the people rule. The third dimension, “depth” refers to the manner of involvement of the participants in the system under evaluation. A given democracy system is shallow if, say, people rule only by voting for officials. A deeper system is where people do more than vote; they engage in meetings, public discussions, contestation, demonstrations, and so forth. The fourth dimension, separation of power, grades governance and democracies in relation to their pluralism and balance of powers. The final dimension, control, focuses on the impact of the decision makers. In other words, control has to do with whether the decisions that the group makes really make a difference in policy and practice. In our context, this fifth dimensions provides a criterion to evaluate the extent to which the EPPCF’s decisions make a real difference in the Ethiopian political economy (Crocker, 2008, 2010, 2012, 2013, and forthcoming; Pettit, 2014). Formation 136 EPPCF culminates years of hard work and negotiation between the private sector and the government to establish a formal, result-oriented and sustainable mechanism for public-private dialogue. The path to establishing EPPCF was tough, long and trying. At least three reasons can help explain why. First, as argued in earlier chapters, an environment of mutual suspicion characterized the relation between the state and private sector in Ethiopia. Due to its alleged “unproductive rent-seeking,” the private sector was not considered fit to be part of the developmental coalition the Ruling Party established. Owing to such rhetoric and the practice that followed, the private sector also viewed laws and regulations enacted by the government suspiciously as a means of “policing” the private sector rather than instruments used to provide a stable environment for businesses by reducing transaction costs, providing certainty and encouraging healthy competition. Such an environment of mutual suspicion made negotiations difficult, for both parties questioned each other’s motives. Second, earlier experiences of a formal public-private dialogue left a scar that needed to heal. The first wave of UNDP supported consultations between the government and the private sector during the late 1990’s and early 2000’s ended abruptly because the government had become increasingly impatient with the way the private sector presented issues for consultation (Miheretu and Tolina, 2015). The government seriously questioned the ability of the private sector to take objective positions based on verifiable and well-researched facts. A new structure needed to address these shortcomings. Third, relations between the Chamber of Commerce’s leadership and the government were particularly tense. In connection with the 2005 national election, the government had unequivocally categorized the Chamber’s leadership as highly politicized and in support of the opposition. The rift strained state-business relations after 2005 and required years of hard work 137 to repair. At the same time, the World Bank Group was working with stakeholders to identify possible opportunities for a structure that would establish a better decision-making process. The two parties had to work out their differences through a long process of negotiations, but the technical intervention from the Bank helped in creating better awareness about the opportunities that a robust dialogue platform would provide (Miheretu and Brew, 2011). The difficult negotiations included a long “naming” battle on whether the forum should be called “Consultative/Dialogue Forum” to reflect the new ideas of political economy. The government refused to accept the term “dialogue” and preferred “consultation” because the former term connoted deliberation amongst equals, while the latter emphasized a hierarchal relationship between the parties (Miheretu & Tolina, 2015). In July 2010, the then Ministry of Trade and Industry and the Ethiopian Chamber of Commerce and Sectoral Associations (ECCSA) finally signed a Memorandum of Understanding (MoU) that mandated the establishment of the Ethiopian Public Private Consultative Forum (EPPCF) as a system to foster evidence-based policy dialogue between the private and public sectors. Even though the term “dialogue” lost out to “consultative” in the new institution’s title, in a country where the level of mistrust between the private and public sector was deep and relations severely strained, the signing of the MoU and the establishment of the EPPCF itself arguably represented a significant milestone in rebuilding government and private sector relations. Structure, Process and Results The EPPCF secretariat began its operation in September 2011 with financial and technical support from the International Financial Corporation (IFC) of the World Bank group. 138 The MoU that established the EPPCF outlines the structure, roles, and responsibility of the public and private sector participants in the EPPCF process. In what one could deem a dual structure, the EPPCF model has two components: The Ministry of Trade and Industry, as the leading public-sector component, and the Ethiopian Chamber of Commerce and Sectoral Associations (ECCSA), as the private sector counterpart. The Ministry established an EPPCF Unit as outlined in the MoU while ECCSA hosts the EPPCF secretariat. A small but nimble team steered the dialogue process in an organized manner and ran the EPPCF secretariat. The Secretariat and the Unit worked cooperatively in leading the dialogue effort. The EPPCF unit at the Ministry of Trade was designed to be a coordination and facilitation mechanism to manage the intra-ministerial coordination. Improving on the initial steps of the dialogue experience of the late 1990’s and early 2000’s, which focused on an annual top-level dialogue, the EPPCF has a broader structure that covers three levels; federal, state, and woreda (local). At the federal level, the dialogue centers upon six sectoral associations that are the pillars of the ECCSA. Moreover, the MoU specifies that Federal Public Private Consultative Forums will be held at least twice a year. The MoU also specifies that a high-level National Business Forum should take place once a year and under the chairmanship of the Prime Minister. In addition to these federal level consultations/dialogues, the MoU also specifies analogous processes and structures on the state and woreda levels. Despite its ambitious and extensive structure, the EPPCF model fails to score well on the breadth dimension. In principle, all members of the private sector have a right to participate in the EPPCF process and have their voices heard. In practice, however, there is a tendency to encourage only larger organization to attend EPPCF events, for it is easier to deal with small number of large well-established entities than a large number of smaller organizations. 139 The EPPCF mechanism has thus exhibited significant weakness on inclusiveness. The consultations/dialogues do not as of yet reflect the perspectives of micro enterprises and small organizations. Part of the problem is that small organizations tend to lack the interest and capacity to engage in dialogue forums to make their voices heard. It is hard for small groups to be interested in participating when there are real doubts that they are welcome. It is difficult to nurture capacity when it is unlikely to be exercised. These limitations are likely to be overcome in and through actual inclusion in the dialogic process. Given EPPCF secretariat’s operational limitations, there has been a risk of catering to an excessively homogeneous crowd at dialogue forums as invitations are often sent to similar companies A review of the attendance sheet of six consecutive forums shows that more than eighty percent of the participants had been invited repeatedly to all six forums. We call for a deliberate effort to target micro and small enterprises.56 Besides, the consultative mechanism remains largely a federal level phenomenon, dominated by federal level institutions and stakeholders. Due to capacity limitations, the EPPCF secretariat has not fully exploited the ambitious structure of the EPPCF model by organizing consultations at lower levels of government. One positive development is the effort by the Secretariat to work in close cooperation with other partners to ensure broader reach. For instance, the EPPCF Secretariat signed MoUs with regional governments and supported regional dialogue forums through regional chambers. An organization called the Center for International Private Enterprise (CIPE) has 56 An issue to be addressed in future efforts to improve the breadth dimension of the EPPCF would be to include civic organizations as well as diverse representatives of the private sector. 140 conducted regional and sub-regional level dialogue forums under the auspices of regional MoUs, which in turn emulated the national level MoU (Miheretu and Tolina, 2015). However, more needs to be done to ensure access to the dialogue mechanisms across the nation and for all types of businesses.57 The EPPCF model has done better on the range dimension. With respect to range in the sense of the scope of topics, EPPCF follows a research-driven process in developing the agenda for dialogue. The EPPCF Secretariat engages the private sector regularly in identifying pressing issues that warrant dialogue with the government. A dialogue forum is always preceded by a rigorous analysis of a potential issue for dialogue. To enhance even more the range of topics, the staff of the EPPCF secretariat might undertake studies or outsource them as needed. Studies conducted by the Private Sector Development (PSD) hub of the ECCSA, also serve as an indispensable source of agenda items. Agendas developed will then be validated by the private sector through validation workshops. In 2014, the secretariat began to approach the agenda development exercise in a more structured way through the development of a National Business Agenda (NBA). The NBA benefited from consultations with a wide variety of businesses and private sector organizations in different regions of the country (EPPCF, 2014). The NBA then formed the basis for dialogue forums held after 2014. With respect to the institutional aspect of range, the institutions in which private sector citizens participated expanded when the public-private structure was iterated on regional and local levels. However, a significant narrowing down unfortunately took place due to the very restrictive civil societies (CSO) law that we discussed in Chapter four. Currently, the new 57 For Peru’s initial but ultimately unsuccessful steps in establishing such regional consultative bodies, see Crocker, 2010. 141 administration is exerting effort to strengthen regional and local bodies and revise the CSO. Opinions vary on how well the EPPCF model has performed in terms of the depth dimension, which concerns how the decision makers make their decisions. Some respondents maintain that the mechanism is sufficiently deep, for the EPPCF events have featured heated debates and serious contestations as well as some deliberation to forge agreements. Others, however, argue that only a few people that engage in vigorous give and take and decision making. Because a majority of the participants are passive participants, the argument goes, the system overall should be evaluated as rather shallow. Even though a legitimate argument can be made in support of the latter view, the current practice does allow discussion and contestation; it should be rated as moving toward deeper democratic decision making. And all the participants have an equal right to speak even though they choose not to exercise it. The silent majority has exercised their agency by preferring to participate as attentive listeners. The EPPCF mechanism exhibits significant shortcomings in terms of the dimensions of separation of power and control. These shortcomings emanate from the very design of the EPPCF mechanism, lack of firm commitment from the government and organizational weaknesses of the private sector. The EPPCF mechanism has also exhibited serious operational weaknesses over the years owing to design issues. The MoU, as we saw, mandated that EPPCF have a dual structure, namely, an EPPCF Unit within the Ministry of Trade and Industry on the government's side and a secretariat hosted by ECCSA on the private sector side. However, the government’s unit was never fully organized and has remained primarily a one-person show.58 58 This one person is a Director at Ministry of Trade assigned to coordinate EPPCF issues from the government’s side. In fact, strictly speaking, even this single individual was not able to give his full attention to the dialogue platform as he also covered several other responsibilities within the Ministry. 142 On the private sector side, the secretariat was established with the support of the IFC of the World Bank group. The IFC covered the full cost of the secretariat’s operation, including staff salary. Probably owing to this funding source, both the Chamber leadership and the government initially tended to view the EPPCF’s secretariat as a donor project. EPPCF sat in an awkward position between ECCSA, IFC and the government counterparts lacking nimbleness in its operation. Such a design has denied EPPCF the opportunity to be visible and prominent. Moreover, the EPPCF staffs were hired on short-term contracts, limiting their ability to make long-term plans. Another major challenge the EPPCF mechanism encountered has been lack of firm commitment from the government’s side. The government’s commitment to the dialogue mechanism never matched the rosy ideals set out in the MoU. It is highly questionable whether many in government understood the crucial role such a dialogue mechanism might play in helping forge strong and effective state-business relations and advancing Ethiopia’s development agenda. The government’s lack of commitment is evidenced by the practice of its officials – people who can break (or make) the platform. Some argue that whatever success the EPPCF had was the result of unique efforts of a few individuals (“the Champions”) within the government. This small band understood the significance of a new and better political economy, one that had promised far better results than the government’s collectivist conventionality. But the downside of this progressivism of a few is that a cabinet reshuffle can quickly “exile” a champion with the result that a Ruling Party loses the opportunity for change and even takes several steps backward. A cabinet reshuffle in 2015, for instance, resulted in a loss of a critical champion at the Ministry of Trade with disastrous consequences for the dialogue process. Among these losses was the discontinuation of the regular yearly meeting – which the MoU 143 referred to as the National Business Conference – of the business community with the Prime Minister. The absence of adequate inclusiveness and a fair distribution of power, in turn, resulted in lopsided influence and control, with the balance of power tilting in favor of the government and its ruling elite. An excellent example in this regard is the obstacles the EPPCF team and the Chamber leadership faced in organizing dialogue forums. In a good number of instances, the government was reluctant and even resistant to take part in these forums. It was also common for Ministries to assign junior officials to chair forums, despite a clear stipulation in the MoU that dialogue forums should be chaired by the responsible Minister themselves. Because junior officials failed to make decisions on the issues raised, such facilitators significantly limited the effectiveness of the overall exercise. Even after the forums had been organized, and implementation of reforms agreed upon, governmental deficits in understanding and commitment resulted in long delays or complete inaction. In addition to its failure to strengthen the EPPCF unit within the Ministry of Trade, the government’s lack of strong commitment to the dialogue mechanism is also evident in its inability to strengthen the legal basis for the dialogue mechanism. Even though the MoU had served a critical role in mandating the EPPCF mechanism, it also had significant limitations due to its failure to establish the “platform” with a solid legal basis. Such a foundation might have rallied all government agencies to the public-private dialogue process. As things stand, the Ministry of Trade, for example, lacks the legal mandate to mobilize other Ministries for change. The private sector repeatedly requested at different forums for the reestablishment of EPPCF as a directive or proclamation (as opposed to an MOU) but with no results to date. The government needs to accord serious attention to this issue. 144 The ongoing weakness of the private sector has also negatively impacted the effectiveness of the EPPCF mechanism. Recall that, the Ethiopian Chamber of Commerce and Sectoral Association (ECCSA) host the EPPCF secretariat. The dialogue mechanism has provided ECCSA a unique opportunity to give voice to and advocate for the Ethiopian private sector. Unfortunately, ECCSA does not yet have the human and financial capacity to run the dialogue mechanism successfully. To make matters worse, the sustainability of the EPPCF mechanism is now in question because the International Financial Corporation has ceased to support the Secretariat. ECCSA’s inability to sustain the EPPCF platform emanates from it organizational weaknesses. The Chamber of Commerce system in Ethiopia has failed to attract big organizations and astute businesspeople as members. The chambers have a shallow membership base that also reflects negatively on their organizational capacity. Big and established businesses show little interest in the activities of the sectoral associations and the chambers. Part of the problem is that the prevailing political economy allows only the rich and powerful to have ready access to policymakers. This creates a disincentive for potential members to join and strengthen chamber activities, because they fear this would not be in their self-interest. The EPPCF was expected to change this trend by providing a more impartial, inclusive and institutionalized mechanism for policy deliberations. Unfortunately, the private sector has not yet come together to create such a mechanism. It is also disappointing that ECCSA’s recent efforts to raise resources through voluntary corporate contributions have not yielded the intended results. In spite of its initial challenges and frustrations, the idea of an inclusive, deliberative, and impactful public private deliberative body is a promising one and one that can and should bear fruit in the future. How that effort might go forward is part of our concern in this paper’s final chapter. 145 CHAPTER SIX TOWARDS AN ALTERNTIVE POLITICAL ECONOMY FRAMEWORK Often considered a role model in and for Africa, the Ethiopian government has been actively pursuing industrial policy (IP) for more than two decades. This study has presented the political economy analysis of this recent industrial policy experience in Ethiopia. The political economy framework is used for this study because there is convincing argument that political factors are critical factors in explaining the successes and failures of IP in different economies. This study has established that promoting industry – in either a narrower or broader sense – requires an understanding of the political history and current equilibrium of a society, the actors and their interests, the political institutions, de facto and de jure power and how these pieces all fit (or should fit) together. It is for this reason that before embarking on the analysis of Ethiopia’s recent industrial policy experience, an effort has been made in this study to interpret the historical and current political settlement in the country. This study employed Whitfield et al.’s (2015) politics of industrial policy in Africa as a main analytical framework. The critical assumption of this framework is that the economic structure of developing countries creates a strong incentive for clientelist politics even if such politics do not necessarily prevent development and effective implementation of industrial policies. As elaborated in earlier chapters, Whitfield et al. believe that, rather than the existence of clientelist politics, what matters is the variations in clientelist relations. Understanding the variations in the clientelist configurations is essential given their significant implications for the emergence of the three conditions (mutual interest, pockets of efficiency and learning for productivity) that Whitfield et al. deem necessary for successful implementation of a defensible industrial policy in Africa. 146 This study has examined different configurations of political organizations based on the two critical dimensions of the Whitfield et al.’s framework: the relative power within and outside the Ruling Coalition and the relative strength of domestic capitalists vis-à-vis ruling elites. In addition to benefitting from applying the Whitfield framework, this study also shows the framework’s limitations. The framework does not explain consistently the conditions under which the three necessary requirements for effective implementation of industrial policy emerge or fail to develop. The current study has provided an explanation of why the necessary conditions were unable to appear even under the “appropriate” configuration of the clientelist political organization. The challenge faced in establishing the three conditions is importantly explained – I have argued -- by the Ruling Party’s failure to create inclusive political and economic institutions. From the beginning, the Ruling Party had resorted to a selective and exclusionary approach in coalition building. The selective exclusion of the private sector and the urban elite from the coalition has created a political environment filled with suspicion, tension, and rivalry. The current political economy, in turn, has limited the Ruling Party’s ability to facilitate the development of the conditions necessary for effective implementation of IP. In a bid to establish a credible and more complete version of political economy, the study builds on but supplements the Whitfield model by defending an alternative political economy framework that includes the relative political and moral power of concerned citizens as a third dimension in addition to the two dimensions identified in the Whitfield model. This approach makes the analysis comprehensive and broad, supporting the addition of a normative dimension to the political economy framework. To that task, only adumbrated in earlier chapters, we now explicitly turn. 147 As presented earlier, the overall development approaches the Ethiopian government has been pursuing since 1991 are based on the fundamental belief that the state can and should play an active role in the economy. The Ethiopian government has pursued the task of building an active developmental coalition, driven by the ideology of revolutionary democracy and the notion of a developmental state. The government’s overriding emphasis was on establishing the hegemony of developmentalism. As part of its developmental agenda, the government saw its critical mission as that of changing the fundamental structure of incentives and disincentives with respect to the economy from one unfriendly to productive activities to one that is inhospitable to rent-seeking activities. Effective state intervention was to overcome the negative attributes of a rent-seeking economy. The prevailing view of the economic man (Homo economicus) assumes that people are entirely and always self-interested and amoral. As shown throughout this essay, the emphasis on Homo economicus has influenced the content of Ethiopia’s IP, for as the State consistently resorted to policy instruments that both exclusively focused on incentives and constraints and completely ignored ethical and other-regarding motives. Therefore, a complete reorientation of the entire development approach is needed to achieve better IP results. Such a shift requires adopting what Sen (1999) calls the more foundational view of development as opposed to “a narrower view of development.” As opposed to the latter that focuses on GDP growth as the end of development, the former perspective views economic growth as an important means to other more basic values such as substantive freedoms, including the liberty of political participation. In turn, this more comprehensive conception of development requires that we add a third dimensions to the two Whitfieldian dimensions (the relative power within and outside the Ruling Coalition and the relative strength of domestic capitalists vis-à-vis ruling elites). 148 The justifications for the inclusion of the relative political and moral power of concerned citizens as part of the alternative political economy framework suggested in this study are several. Normatively, a strong case can be made for democracy’s intrinsic value. Sen, for instance, maintains that because democratic freedoms enable citizens to participate politically, people have reason to value such freedom intrinsically (Crocker, 2008, p.299). In Ethiopia, the 2005 election and post-2014 developments have demonstrated beyond reasonable doubt that Ethiopians accord value to substantive freedoms such as basic political and social liberties. The public’s enthusiastic response to the opening of the political space in 2005 is not only a proof of the value the Ethiopian society attaches to democratic rights, but it was also an explicit rejection of the Ruling Party’s “development first” approach. Thus, normative factors that promote equity, citizen voice, and inclusivity, can and should shape Ethiopia's economics. When considering notions of fairness and equity, citizen rights, civil society, and institutions, among others, there is a better chance that the other necessary conditions might emerge more quickly and durably. Because Ethiopia as a nation has suffered from a failure to establish a lasting and inclusive political settlement, a political economy framework that fails to take citizen’s basic liberties into account is likely to be a failure again. Industry policy can be successful when the process aspect of development is right. The freedom an individual enjoys by freely participating in the political process is immensely valuable in and of itself as it exercises agency and results in the achievement of agency (Crocker, 2008). In other words, people should exercise their agency, a term that “has to do with individuals and communities running their own lives, being in the driver’s seat of their affairs (Crocker, 2012, p.48). Protecting such a role for citizens gives the State and its directing (and coercive) role moral and political legitimacy (Pettit, 2014). 149 This study has also established the critical importance of what Sen (1999) describes as the instrumental and constructive roles of democracy, referring to government’s obligation to listen to what their citizens want and to the mechanism of exchanging views to generate informed and reflected choices, including the formation of values and priorities. In the case of Ethiopia, as this study demonstrates, the process of formulating and implementing IP has, typically, followed a top-down approach, effectively excluding the private sector and the public at large from the decision-making process. Such an approach has contributed to poor IP outcomes as the process lacked the dynamism to learn from mistakes and make timely improvements as well as the loyal commitment of the vast majority of its citizenry. The top-down approach left little to no room for meaningful citizen participation and was coupled with the suppression of citizen rights. The outcome has been the creation of an environment whereby citizens are afraid to question the actions of the government or, when they have the courage to do so, they are violently repressed. The resultant lack of transparency, accountability, and citizen loyalty and has led to significant abuse of power, embezzlement, and waste of resources. The further consequence has been poor policy outcomes. The investment the government had made in several mega projects had become the source of major corruption, inefficiency, and waste. Had there been a system of transparency and accountability, the government would have been able to detect mistakes early on and take corrective actions. Lack of strategic collaboration between the private sector and the government has also resulted in substantial opportunity costs. The government’s top-down dogmatic policy has severely limited the discovery of new possibilities by the private and civil society sector, resulting in lost opportunity as far as new opportunities go. Thus, ensuring the sustainability of the development project in Ethiopia requires transforming the nature of state-society relations. Such transformation demands a complete change in mindset for the Ruling Party needs to 150 reexamine its views on how an effective, fair and sustainable developmental coalition can be established. We have amply seen that the Ruling Party’s resort to selective and exclusionary approach had severely damaged the prospect of forming a sustainable political settlement. Serious consideration now should be given to institutionalizing the political and moral power of concerned citizens as end in itself and a means to help establish a lasting political settlement. A sustainable political settlement demands a combination of power, norms, and institutions that are mutually compatible as well as sustainable with respect to economic and political viability. Issues of fairness and equity are critical in this regard as it is only when powerful – as well as less powerful – groups within the society have gained an acceptable benefit from an institutional structure that a sustainable political settlement can be achieved. It is only then that the combination of their power and the institutional structure becomes mutually compatible. The understanding of the dominant groups in the society, however, should not be limited to political parties and capitalists, as is the case, for instance, in Whitefield et al.’s model. The society at large and its hitherto neglected citizens should be included. In Ethiopia, for example, the youth have been a formidable force in the political transformation in Ethiopia, particularly after 2014. Any political formation that does not include the youth and does not address their grievances is unlikely to be sustainable. The role of inclusive, participatory and non-extractive institutions is also critical as they provide a robust mechanism to express dissent, deliberate and agree on mutually beneficial solutions for all concerned. When inclusive and fair institutional structures are in place, the dominant power groups in society prefer to sustain such a status quo. Sustainability is critical, among other things, as institutions, both formal and informal, 151 have to achieve the minimum levels of economic performance, fairness, and political stability that are required for the reproduction of particular societies (Khan, 1995). The resultant social order, which is a result of a political compromise made between different groups, is what we refer to as a political settlement. The political settlement is a useful concept to understand the rationale behind the actions of the ruling elite but also a fair arrangement that most citizens can consent to and participate in. The concept of political settlement offers the opportunity contextually to understand the distribution of power in society, how the power structure affects policymaking and implementation, and how power and its structures can and should be shaped in and through engaged and democratic citizens. In the past, the discourse on democracy has not been more than just a cosmetic patina. In spite of the rhetoric of the democratic developmental state, the government has not taken concrete measures that focused on the promotion and expansion of substantive freedoms such as the liberty and institutions of political participation. The government’s lukewarm approach to democratization emanates from its ideological orientation that maintains the hegemony of (top- down) developmentalism. Proponents of the “development first” approach argue that democracies are more susceptible to popular demands and interest group influence, limiting the ability of the state to force savings and facilitate long-term investments. In other words, there are concerns that democracy could be messy and delay the ability of the state to plan and lead the economic growth project. Democracy can be chaotic and may have its challenges, but as the Ethiopian experience shows, it is much better than the alternative. The answer is not less democracy but more and better democracy. For intrinsic, instrumental, and constructive reasons, this study has defended a foundational or normative view of development, for the Ethiopian public has bitterly struggled over the last decades to achieve the freedom to enjoy fundamental democratic rights. The 152 government’s approach to deny people the exercise of their agency in the name of developmentalism had resulted in significant costs. The government’s misguided approach to development (focused only on economic growth) has not only limited the effectiveness of industrial policy but also risks not sustaining the limited results archived to date. In a country like Ethiopia, where the very question of state formation is not resolved and a viable political settlement has not been achieved, the process as well as the opportunity aspect of freedom is critical. The precarious nature of state-business relations, I have argued, needs to be conceived anew. As a critical engine of growth, the private sector should be seen as an indispensable part of the developmental coalition. Failure genuinely to appreciate this point and ensure the efficient functioning of the engine could potentially upset the entire development project. Borrowing Evans’s (1995) terminology, the state needs an “embedded autonomy.” As discussed earlier, a developmental state needs to have a strong autonomy, an internal organization that closely resembles a Weberian bureaucracy. It requires a corporate coherence so that the State can manage, lead and direct the development project. This means strong state capabilities need to emerge, at least in certain pockets of the bureaucracy. For the autonomy to be embedded, however, the state and businesses need have a concrete set of social ties. Neither autonomy nor embeddedness is complete on its own. The State’s autonomy should be embedded autonomy, providing it with the legitimacy and credibility required to rally the nation behind the developmental project. One effective way of realizing an embedded autonomy is through the strengthening of institutional channels for strategic collaboration such as the embryonic EPPCF platform. Effective SBR requires an open and honest engagement with the private sector on an ongoing basis: the EPPCF mechanism is a step in the right direction in this regard. Therefore, the 153 EPPCF should be re-established by governmental directive or proclamation to strengthen the legal mandate of the Consultative Forum. Moreover, the legal instrument should identify the required human and physical resources for the effective functioning of the Secretariat. To strengthen the sense and reality of ownership, both the private sector and the government should commit the resources required to enhance and effectively run the activities of such a platform. In his more recent work, Evans (2008), expands the notion of embeddedness even further to include a "bottom-up" set of state-society ties, going beyond the state-business relations. The need for denser embeddedness, Evans argues, arises because of the change in the source of growth. As opposed to the conventional 20th-century growth model, was anchored in the expansion of machine production and a blue-collar middle class, growth has become “bit- driven,” depending on generating assets such as ideas, skills, and networks, rather than stimulating investment in machinery and physical assets oriented to the production of tangible goods. The state’s role, thus, should be focused on expanding investment in human capabilities (Evans, 2008) – what Sen calls freedoms that people have reason to value. In the last few years, on the most fundamental level, the Ruling Party’s ideological underpinnings have been put to the test. We have seen that the Ruling Party had presented revolutionary democracy as an ideal approach to help change the fundamental structure of incentives and disincentives of the economy from one that is unfriendly to productive activities to one that is inhospitable to rent-seeking activities. In reality, the nation witnessed the emergence of a dense patronage and extractive network across all level of the government. Relatedly, we have also argued that the overwhelming emphasis on material incentives and constraints, as evidenced in the content of Ethiopia’s IP, has also severely limited the effectiveness of its policy instruments. We submitted evidence that the several incentives and 154 supports provided to priority sectors either might have not been impactful or have had effects at odds with what was intended. Often, the excessive focus on material incentives is likely to have resulted in unforeseen negative consequences. As Bowles (2016) notes, no matter how cleverly designed, incentives alone cannot provide the foundation for good governance and by themselves such incentives contribute to bad governance. The government’s misguided approach, premised on the assumption that it can dismantle the rent-seeking political economy by “productively” managing rents, proved to be a failure. Rather than helping promote productivity and competitiveness, the incentives the government provided ended up creating a growing desire for more and more incentives. As Bowles maintains, an unintended cultural consequence of such an excessive focus on material incentives has been the erosion of the ethical and other social motivations essential to good governance. We have shown that Ethiopia’s excessive focus on material incentives had begun to erode ethical and other-regarding motives. Thus, there is a need to revise Ethiopia’s development policy framework based on the more credible and complete version of political economy that seriously takes into account ethical and other-regarding motives in the policy-making process. Though incentives and constraints are essential to any system of governance, there is a risk that incentives might backfire if they foster the very self-interest that they were designed to harness in the service of public good (Bowles, 2016). Bowles presents strong empirical evidence that policies and incentives that appeal to material self-interest pose a severe risk of crowding out ethical and other-regarding motives that human beings naturally possess. At the most fundamental level, excessive focus on material incentives risks compromising the social norms essential to the workings of the market system. Bowls’ observation is worth quoting at length: 155 Included among the cultural causalities of this so-called crowding-out process are such workaday virtues as truthfully reporting one’s assets and liabilities when seeking a loan, keeping one’s word, and working hard even when nobody is looking. Markets and other economic institutions do not work well where these and other norms are absent or compromised. Even more than in the past, high-performance knowledge-based economies today require the cultural underpinnings of these and other social norms. Among these is the assurance that a handshake is indeed a handshake; where one doubts this, mutual gains from the exchange may be limited by distrust (2016, pp. 2-3). Sen (1999) also attaches strong value to certain norms and social values that inform economic and political relationships. Shared norms, Sen argues, may determine the presence or absence of corruption or its relative degree of prevalence. For these norms and shared social values prescribe and affect the role of trust in economic, social and even political relationships. This idea of shared norms poses the classic “chicken and egg” problem. Which comes first? Does the existence of shared norms facilitate the development of trustful and healthy relationships in the political, social and economic spheres? Or are shared norms dependent on the amount of trust in the existing relationships? Arguably, the causal arrows go in both directions. These questions are also relevant to the broader political economy discourse: just as political- economy factors affect the development and implementation of industrial policy in Ethiopia, so the practice of a credible IP may beneficially affect shared norms and trusting relationships. A useful approach will be to view several institutions as an integrated whole. Such a view requires a simultaneous appreciation of the vital role many institutions including, the government, markets, political parties, civic institutions, social institutions, and the media play. Development, in this case, is looked at as an integrated process of expansion of substantive freedoms that connect with one another. The Ethiopian government, however, had shown scant regard for many institutions, institutional networks or the decision-making process. The Ruling Party, as we have seen, squandered an historic opportunity to create inclusive political and economic institutions during 156 the transitional period. Developments over the last two decades were also detrimental to the institutional building process. In this regard, we analyzed the ways in which the Ruling Party created a dense patronage network within itself and across the government. Not only did this practice undermine the judicatory and the constitutional processes and weaken political institutions on all levels but also nearly destroyed civil society institutions, among others. Douglass North (1987) provides fascinating insight as to why governments – as was the case in Ethiopia – fail to build inclusive institutions that facilitate sustainable economic growth. North argues that absence of certain common-good oriented institutions enables special interest groups to exploit other groups, for governments can easily legitimize (or restrict) certain transactions and undermine property rights. Strong, fair and efficient institutions can minimize transaction costs and promote the common good, often at a cost to those special interest groups that have been vital to the survival of the ruling group. Civic and social institutions provide a powerful illustration of why it is useful to view public, private, and civil society institutions as an integrated whole, simultaneously appreciating the vital role each and all institutions can and should play. To build a moral economy with a society that also values good citizenship (as opposed to material incentives alone), civil and social institutions play a crucial role by complementing or correcting the role other institutions such as government, markets, and political institutions play. Focusing on nurturing morality using social institutions can strongly complement the role political institutions play. For instance, despite his less optimistic view of the prospects of democracy in general, Fareed Zakaria (2003) emphasizes the value of legal and moral standards in strengthening a democratic ethos. Zakaria calls upon those with immense power in society to embrace their responsibilities and lead by setting strong legal and moral examples. Without this 157 inner stuffing, he argues, “democracy will become an empty shell, not simply inadequate but potentially dangerous, bringing with its erosion of liberty, the manipulation of freedom, and the decay of common life” (2003, p. 256). The role civil society or the public sphere plays in ensuring the richness of a democratic process by allowing a space for trusting relationships and social deliberation is also worth highlighting. Philosopher Benhabib (1994) notes that in detecting and identifying new problem situations, the civil-society periphery – in contrast to the political center – has the advantage of higher sensitivity and greater innovation. As the electoral democracy turns more and more into a “minimalist democracy,” wherein people do little more than vote their representatives periodically and let them rule until the next election, the importance of deliberation and other forms of civic engagement are becoming increasingly important. By allowing people to pool their information together and probe each other’s premises, what Goodin (2008) calls “micro deliberative” engagements, have much to contribute to enriching the ‘macro-political’ democratic process focused on periodic voting. Goodin’s argument is worth quoting at length: Hearing one another’s reasons rather than merely their conclusions, talking together rather than mutually counting ballots, allows us to understand better the deeper meaning of one another’s attitudes, actions, and behavior (2008, p. 255). On the other hand, as experiences of societies that exercise matured democratic practices show, strong and independent institutions can also help overcome the inherent problems of democratic systems. As Zakaria (2003) notes, while public respect for politics and political systems in countries that exercise advanced democracy is at an all-time low, the public respect for institutions that are insulated from political pressures is high. In the United States, for instance, poll after poll shows that the Supreme Court, the Armed Forces, and the Federal 158 Reserve System are the most respected institutions. Zakaria (2003) rightly notes what these three institutions have in common is their insulation from public pressure and that they operate undemocratically. Such pockets of efficiency ought to emerge for effective implementation of IP. Yet the short run insolation from public pressure is part of a long run democratic design for separation and balance of power. In aspiring countries like Ethiopia, an effective industrial policy might delegate specific functions to independent or semi-independent institutions.59 In addition to central banks, it might be worthwhile to consider providing certain institutions like ministries of planning or economy, to help create a certain level of stability and continuity amid the periodic electoral turmoil (Zakaria, 2003). Care should be taken in such an effort, however, to supplement the current public, civic, and private institutions so that all work in complementary and corrective ways as an integrated whole. Civic and social institutions provide a powerful illustration of why it is useful to view several institutions as an integrated whole, simultaneously appreciating the vital role each institution can and should play. A combination of inclusive political institutions; independent and competent economic institutions; and a myriad of other institutions that nurture moral values and help complement the democratic deficit through deliberations, provide a meaningful opportunity for sustainable political settlement. Our conclusion is that assessing the objectives and functions of those institutions that lead to policy and opportunities for economic transformation should make them more democratic 59 An agenda for future research will be to investigate the relevance of Ethiopia’s experience for other SSA countries. 159 by being more economically and politically inclusive (Acemoglu and Robinson, 2009). In support, we join scholars such as Bowles (2016) and Zakaria (2003) in arguing that a state's power, legitimacy, and effectiveness can produce a virtuous circle that nurtures political pluralism, overcomes marginalization, and delegates authority to secure and independent institutions. 160 Appendix Table I. Respondents’ Profile and Interview Date Number Respondent’s Profile Place and Date of Remarks Interview 1 Veteran members of the Ruling Addis Ababa, Ethiopia; Four respondents were Coalition. December 2015, May interviewed in 2016, March 2018 December 2015, two respondents in May 2016, and two respondents in March 2018. 2 Members of the opposition Addis Ababa, Ethiopia; Two respondents were party May 2016, September interviewed in May 2018 2016 and one respondent was interviewed in September 2018. 3 Senior government officials Addis Ababa, Ethiopia, A total of nine drawn from several Ministries December 2015 respondents drawn from Ministry of Trade, Ministry of Industry (including sectoral association under the Ministry), Ministry of Finance and Economic Development, Maritime affairs of the Ministry of Transport, Ministry of Foreign Affairs and Ministry of Agriculture, were interviewed. The interviews were conducted as part of a trade diagnostic study conducted under the auspices of the Ministry of Trade of Ethiopia and sponsored by UNCTAD (United Nations Conference on Trade and Development. 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