Ethiopia Should Resist the Neoliberal ‘Shock Therapy’

Tebeje Molla, Ph.D.

As part of the much-anticipated political transformation, Prime Minister Abiy Ahmed’s Government pledged a swift economic reform. The Government specifically expressed its intention to fully or partially privatize four key public enterprises: Ethio Telecom, Ethiopian Electric Power, Ethiopian Airlines, and Ethiopian Shipping & Logistics Services Enterprise. In doing so, Abiy’s Government aims to attract foreign investment and stimulate economic growth.

Following the Prime Minister’s public statement, in 2019, the Ethiopian Parliament approved a proclamation of the privatisation of public enterprises. In so doing, the Government launched the liberalization of the state-owned companies. This is a clear signal that the ruling party is on the verge of abandoning the developmental state model that it once zealously endorsed. As one observer has rightly noted, in the past, through the developmental state lens, what Meles saw in neoliberalism was a ‘dead end’; now Abiy sees a ‘new horizon’.

The article puts the liberalization agenda in some historical and political perspectives and argues that neoliberal policy imposition made under a condition of political shock is consequential and potentially dangerous.

Neoliberal Shock Therapy

Shock results from a sudden and unpredictable turmoil, be it a natural disaster or a political crisis. It represents fear and uncertainty. Shock activates a sense of urgency in our response. When it happens in a national political space, a shock is a sign of vulnerability. Especially in the context of a weak state and dysfunctional political order, shock signals danger. It invites external intervention.

In her book, The Shock Doctrine, Canadian journalist and activist Naomi Klein documents how neoliberal plutocrats exploit disasters that produce a collective shock. She uses the term ‘shock doctrine to describe “the quite brutal tactic of systematically using the public’s disorientation following a collective shock” to push through radical pro-corporate measures”. Shock therapy refers to this calculated neoliberal response to conditions of the crisis resulted from wars, coups, terrorist attacks, market crashes or natural disasters. Klein substantiates her claims with empirical accounts from Chile, Russia, Iraq, etc.

Klein observes that neoliberals subscribe to a bit of Machiavellian advice: injuries should be inflicted “all at once” – at the time when one is weak and confused.

In the last four decades, proponents of the unfettered market have taken advantage of extraordinary conditions (e.g., deep economic crisis or heightened political instability) to provoke their neoliberal agendas of privatization, deregulation, and decentralization. In nearly all cases, the shock therapy ends with political and economic disaster for the locals. I want to briefly discuss two examples.

Chile in the 1970s

In 1973, General Augusto Pinochet carried out a violent coup to topple a communist government that challenged the economic interests of major global actors including the U.S. This political crisis coupled with severe hyperinflation forced Chile to enter into a deep state of shock. Amidst the crisis, with the support of the U.S. government and the World Bank, leading neoliberal proponents (the so-called the Chicago Boys) advised the Chilean dictator to use “shock treatment” and thereby to stabilize, privatize and liberalize the economy.

The underlying assumption was that under conditions of awe and uncertainty, people have no choice but to adjust to changes. Hence the neoliberals saw the political and economic crisis in Chile as an opportunity for testing their market principles. They aggressively pushed the government to privatize public enterprises, and deregulate the financial system. As a result, the nation’s key economic resources (i.e. big copper mining companies) were sold to foreign investors.

In the short term, the country enjoyed an economic success that dubbed as a ‘miracle’. However, in the long run, the outcome was nothing short of a catastrophe. The national wealth is concentrated in the hands of the few, poverty has deepened, and the distribution of social opportunities such as education and health remains unequal and insufficient.Desperate actions of the government, including nationalizing privatized companies, could not avert the damage.

Yemen Today

If Klein updates her brilliant book, she would include the crisis in Yemen to illustrate the unpredictable consequences of neoliberal shock therapy.Yemen’s major political crisis began when the ‘Arab Spring’ drew protesters into the street of the capital in 2011. Modest compromises and changes failed to satisfy competing demands of the country’s political forces (and their foreign masters). The political crisis quickly escalated into violence. Soon the country was in a state of shock and awe. The transitional government could not maintain law and order.

In Destroying Yemen, Isa Blumi documented that, in the face of deteriorating political and economic circumstances, the transition government was under pressure to sell public enterprises to foreign investors. As part of the conditionality of its credit to the government, in the name of averting austerity, the IMF prescribed ‘free trade’ policies that allow foreign investors from Saudi Arabia and Qatar to buy the nation’s most valuable assets, e.g. national oil refineries. As part of the deal, the Saudi Government deposited $2 billion directly into Yemen’s central bank (note also Riyadh’s recent $250 million transfer to the account of the central bank of Sudan).

For some Yemeni groups (e.g. Houthi), this was an unacceptable deal. Hence, when the group temporarily assumed power in 2014/15, they reversed the arrangement. This angered the neoliberals (and their Mideastern cliques) who were on the verge of controlling vital economic resources of the country.

What followed was a disaster. A bloody civil war broke out in 2015. Under the cover of the ‘war on terror’, the Saudi government and its Western and regional allies authorized themselves to intervene in Yemen. As a result, the humanitarian crisis is heartbreaking, and the country is now at risk of disintegration.  

Lessons for Ethiopia

In the last few months, the hostility of the international community (associated with GERD and the political and economic crisis in Tigrai) has intensified, leading to an economic downturn that puts extra pressure on the Government to further liberalise the economy. For example, on the one hand, the U.S. Government and other donors have withheld critical developmental aid (using the internal political crisis as a pretext), on the other hand, the World Bank (their neoliberal agent) urged the Government to privatise the telecom sector as soon as possible. That is a typical example of ‘shock therapy, and it is DANGEROUS.

The lesson from the experiences of Chile and Yemen is evidently clear: do not rush to liberalise the economy under a state of political instability. At present, Ethiopia is in a state of political shock. The promise of positive change that has accompanied the ascent to power of Abiy Ahmed remains just a promise. With the rise of intensified ethnic extremism, the country’s transition to a democratic political order appears to be a distant mirage. With each passing day, our sense of uncertainty deepens. Amidst this widespread anxiety come the shock therapists: the Bretton Woods Institutions, the European Union and the United States Government as well as peripheral/regional power players in the Middle East.

Abiy Ahmed assumed power in April 2018. In June 2018, the United Arab Emirate pledged $3 billion in aid and investment. In October 2018, the World Bank approved a total of $1.2 billion to support the Government’s “policies designed to accelerate economic growth”. What these and other donors wanted in return has not been made public but we know that the dollars are often attached to policy conditionalities – mainly aiming at further liberalizing the economic sector.

Neoliberal forces do not necessarily instigate political and economic crises (although they are doing exactly that by putting unnecessary political and economic pressure on the Government). However, in the context of aid-recipient poor countries such as Ethiopia, they are always ready to exploit such calamities. Hence, in dealing with the latest round of neoliberal pressure, there is a vital lesson to be learned from the experiences of Chile and Yemen. The privatization of treasured public holdings – whether it is Chile’s lucrative copper mining fields, Yemen’s valuable oil refineries or Ethiopia’s profitable airline – serves only the interest of transnational corporates based in the global North.  Private investors focus on maximizing their profit and are unlikely to reinvest their returns in the country. In other words, privatizing profitable public assets diminishes the national wealth, and the Government will have limited access to resources that can be reinvested in vital services such as education and health.

Many economists and commentators have argued that the privatization initiative should be implemented case by case. I would like to substantiate this claim using the case of Ethiopian Airlines. While there are state-owned enterprises that would benefit from effective private management, Ethiopian Airlines is not one of them. 

Ethiopian Airlines is probably the nation’s most profitable and well-managed public enterprise. With 110 modern aircraft and over 100 international destinations, the national flag carrier is the largest in Africa by revenue, and indeed one of the most successful public enterprise in the world. As a testimony of its incomparable achievements, it has won many regional and international awards. As CNN reports, Ethiopian has positioned itself to dominate Africa’s aviation sector, expanding its shares in other African countries’ airlines (including Ghana, Burkina Faso, Rwanda, Cote Devour, Mali, Mozambique, and Zambia). In other words, if at the core of the privatization initiative is the need to improve the efficiency and profitability of public assets, the privatization of Ethiopian is not justifiable. 

The success of Ethiopian also represents the historical achievements of generations of Ethiopians. It embodies the resilience of the nation. Ethiopian Airlines started operation (in 1946) when most African nations were still under a colonial yoke. In effect, to privatize such an institution is a political sell-out, a betrayal of a shared heritage.

The other key concern is that at the moment there are no reliable institutions that can ensure transparency and accountability in the transfer of assets from the public to the private. In this context, there is a possibility that the national wealth can be unfairly transferred to the hands of those who are connected to the political elite and thereby create an oligarchy – what had happened in Russia nearly three decades ago is illustrative of the risk. Even though the Prime Minister has established an advisory council for privatization, its functionality is yet to be seen.

The liberalization of the economy needs public deliberation. In a multiethnic society such as Ethiopia, an unhealthy concentration of national wealth in the hands of foreign corporations and corrupted political cliques is a recipe for serious social and political ills.  The success of developmental states of China, Singapore, South Korea, Malaysia, and Vietnam suggests that economic security is a safeguard for political stability. Hence, the political transition spearheaded by Abiy Ahmed’s Government needs to take the economic variable very seriously.  With shrinking national cake, self-interested ethnic nationalists will not hesitate to use the economic grievance of the mass, mobilize their base, and take chauvinistic political positions. In so doing, they undermine symbiotic inter-ethnic relations and the very existence of Ethiopia itself.  

Even worse, there is a high possibility that those lucrative public enterprises may end up in the hands of the Arab states of the Persian Gulf with deep pockets. Any conscious Ethiopian would understand that—for historical, cultural and geopolitical reasons—this is a perilous scenario. The existing cultural and political disenchantment creates a fertile ground for those foreign forces to nurture dissent and thereby endanger national unity (we must not lose sight of Egypt’s long hands!) Our fate might then become what we are witnessing in Yemen today.

The bottom line is this: if there is anything that Abiy Ahmed’s Government should learn from that of Meles Zenawi’s, it is the importance of holding one’s ground while negotiating with foreign lenders and donors. And it is unwise to make sweeping economic policy decisions when you are in a state of political volatility.

The author can be reached at tebe12@gmail.com, An earlier version of this piece was published in the African Review of Political Economy