Ethiopia and “China’s Model”

By Daniel Teferra (PhD)  
Mr. Edmund Blair (Reuters), in his article of October 15th, reports about a concern from the Honorable Mr. Girma Seifu Maru, Ethiopia’s sole opposition member of parliament. The MP says that the Ethiopian Regime is suppressing individual freedom and human rights by following the Chinese model, whose “primary issue is economic development.”
However, in the first place, it is questionable if the so-called Chinese model can be sustained on a long term basis. Secondly, even if one assumes that the model is sustainable, there is no proof that Ethiopia has the capacity to emulate China’s model and achieve economic development. Therefore, the Regime’s assertion that it is following the Chinese model seems to be a political strategy for self-preservation, which in itself is unsustainable in the long-run. For instance, the history of the former Soviet Union showed that a command growth model initially helped promote a rate of growth more rapid than would likely be possible in a free market economy. However, ultimately, the system failed to meet the changing economic needs of the society; and consequently, it collapsed.
The Chinese Communist Party, since 1980, has been tweaking its socialist economy to stave off a similar outcome. Thus, it allowed the free enterprise system to function on a limited scale and opened up some coastal regions to foreign capital and technology. This reform policy enabled multinational corporations from the United States and other industrialized societies to exploit China’s skilled and cheap labor in partnership with China’s state-owned companies. The strategy paid China handsome dividends and bought the Chinese Communist Party a new lease in life. Today, China is a major beneficiary of globalization, which it once undermined vigorously, calling it American imperialism. The combination of foreign capital and Chinese cheap labor made China the second largest producer of GDP in the world after the United States of America, surpassing Japan and Germany. The wage system in China attracts tens of millions of people from the countryside to the urban centers. This necessitated a large amount of government investment in infrastructure and housing, thereby expanding the economy further. China became a major exporter of manufactured goods and its foreign exchange earnings soared. It has been able to keep the dollar-value of its currency, the Yuan, low so that it can continue to amass export earnings. Hence, the government was able to finance its spending in infrastructure and housing, invest in the private as well as public sectors in the United States and elsewhere, pay for its ever-increasing imports and give poor countries loans and development aid. It is logical, therefore, to ask if China’s model of tweaking the economy on the edges while denying freedom and democracy is sustainable indefinitely. There are several scenarios why China’s model may not be sustainable. First, all those residential and commercial constructions of the government have to have domestic buyers, who have adequate incomes. This means that the Chinese government cannot continue to suppress wages below free market levels for the sake of attracting foreign capital and technology. Furthermore, if China wants to attract foreign buyers, it has to institute a private property right and liberalize its economic system. Otherwise, the government and its state-owned banks will sit on empty buildings and infrastructure; and for how long? Second, China’s state-owned companies are involved in doing many businesses, such as, road construction and mining activities in Ethiopia and other African countries. However, the private sector and labor in these countries are complaining that Chinese companies hire mainly their own managers and workers. This may force the Chinese government and its companies to work with domestic entrepreneurs and labor rather than with selfish and restrictive African governments only. Third, labor in the United States and the rest of western countries has been complaining constantly that China has not been playing by fair rules, holding wages and the value of its currency artificially low. Hence, Western governments may eventually force China to free its labor market so that Chinese wages can converge with wages in the rest of the industrialized societies. Fourth, as China continues to keep the dollar value of the Yuan low and prices of its goods cheaper, by increasing the supply of its Yuan, the United States can counter this policy by increasing the supply of the dollar. Furthermore, as China continues to increase the supply of the Yuan, consumer prices at home will continue to rise. Consequently, China may finally be forced to float its under-valued currency, and the dollar-value of the Yuan will be determined by the forces of demand and supply in the foreign exchange market. Fifth, and most importantly, one has to realize the social transformation that has been brought about by the wage system in China since the implementation of China’s model. The Chinese middle class is growing at a faster rate and its wealthy segment is demanding social and political status commensurate with its economic power. Furthermore, wealthy Chinese are sending their children in large numbers to America and other western countries for higher education. These students will now have the opportunity to observe how the democratic process in the free world works, relative to China’s one-party rule, and may one day demand to have the same kind of freedom and democracy in their own country. Given all these possible scenarios, it is safe to say that China’s model may not be sustained in the long-run. Even if one assumes that it can be sustained indefinitely, Ethiopia does not possess the capacity to emulate China’s model. For instance, Ethiopia does not have a long history of manufacturing experience. Secondly, Ethiopia does not have a large amount of mobile and highly educated labor force. The majority of Ethiopians are uneducated, poor peasants. Furthermore, Ethiopia’s domestic markets and production capabilities are not yet developed. Therefore, what Ethiopia desperately needs now is a transition to a market economy and democracy. This will enable the country to acquire the capacity to attract foreign capital and internalize modern technology. As a result, Ethiopia will be able to achieve economic development and enjoy the benefits of globalization. The first task of a transition is implementing a genuine land reform program that can transfer land from a state monopoly to private hands. However, the current Regime is not going to willingly relinquish its monopoly over land because this would diminish its power. But the state cannot continue its monopoly forever. A democratic government, dedicated to freedom, will eventually privatize land and transition Ethiopia to a market economy and democracy. ---
Dr Daniel Teferra is Professor of Economics, Emeritus at Ferris State University, presently at UW-Whitewater.