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USA-Ethiopia Long-term Development Cooperation: Private sector-led Economic Growth as Shared Objective

Tsegaye Tegenu, Ph.D.
May 31, 2021

People of the United States and people of Ethiopia share the same values: kindness, caring for others, admiration of bravery, showing appreciation and gratitude for others, decency, cultural assimilation, to name but a few. The success of the Ethiopian diaspora in USA is a result of such shared values. American intellectuals, military officers and non-governmental organizations who held these values have devoted their resources, life, and carrier in helping Ethiopia. Instead of encouraging such shared values, the current USA administration is unfortunately following an outdated strategy of destabilizing Ethiopia for the purpose of short-term political gains. This uncalled-for and ahistorical process should be stopped and be replaced by a win-win strategy that promotes the shared values of the two countries.

One area of bilateral development cooperation is the promotion of domestic private sector and market development in Ethiopia. USA became rich because it has a tradition of strong private sector and free market economy. According to mainstream economics, the lack of development in Ethiopia is partly attributed to shortage of capital, market fragmentation and capacity to absorb and effectively use new technologies. Ethiopian statistics on private sector shows structural deficits of the domestic companies, enterprise, and business in capital accumulation and technology use. Few years back, USAID has launched a new Private-Sector Engagement Policy to help countries lift out of poverty. This new USAID policy can be adopted as a strategy for private sector development and endogenous economic growth in Ethiopia. The stability and continued prosperity of USA depends on the success of promoting and spreading its values shared by other countries.

The private sector in Ethiopia is positioned as a supplement to the state-owned economy. Since, the last 55 years, the share of the private sector to the gross domestic product (GDP) remained low at 12,5% on average. Currently it stood at 20%, the rest of the GDP being controlled by the political elite (39%), and by non-market demographic reproducing households (41%). In USA, private companies contribute 87% of the annual GDP, and Government 13%. The low level of private sector development in Ethiopia shows its limited ability of creating jobs, income increase and organizational capability to push for regulatory reforms.

Private sector can be defined as part of an economy owned by individuals and/or corporates who have motives not only of making profit (price minus cost) but also investing it to make more profits. The private sector includes all business that are managed and owned by incorporated enterprises and individual entrepreneurs who have started and grown their business taking advantage of unique business opportunities.

There are different components of private sector promotion in Ethiopia. At the macro level, USAID can provide support for the investment climate to reduce transaction costs, risks and uncertainty for market participants. It can support physical infrastructure and practice of industrial and agricultural policies which are important for investors and companies. At microlevel, USAID can support enterprise resources and capability for innovation and productivity through skill-building programs.

Supporting the private sector development does not mean that the market is free of failure. Market transactions depend on a terribly expensive array of institutional arrangements necessary to induce private investors to put scarce capital at risk in contracts and investments. USAID can also help to improve the Ethiopian market system, market structure and market institutions.

According to USAID policy document paper, “The private sector creates nine out of ten jobs in the developing world, and provides an important pathway to self-reliance. It is the driving force behind new innovations that solve problems. It brings expertise to building local markets that match local savings with investment opportunities, and provide countries with the tools to finance their own development. The private sector has the scale and resources to match the complexity of challenges countries face on their Journey to Self-Reliance”.

It is now time for the Biden Administration to stand by American values and declared policies.

 

References and Background Papers

 

Author: Tsegaye Tegenu, Ph.D.

Email: tsegayetegenu5@gmail.com

            Tsegaye.tegenu@epmc.se

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