Economic reforms are tempting finance back to Ethiopia and Zambia #NewsUnitedStates

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is author of ‘Left Behind’ and a professor at Oxford university

As the west has diverted aid to Ukraine and Gaza, Africa faces neglect. A few countries on the continent have panicked and turned to Russia, while the prudent are embracing economic reforms to attract foreign direct investment.

Among the latter, financial markets are most familiar with South Africa, Kenya and Nigeria. In each, reform of the real economy is under way but has hit the constraints of patronage politics. The people don’t trust their governments with the higher taxes without which the state remains dependent upon rising indebtedness. Meanwhile, unnoticed by the markets, Ethiopia and Zambia are embracing sustainable reforms, in each case big enough to warrant investor interest.  

For 30 years Ethiopia was ruled by the Tigray minority, the economy being self-sufficient to the point of paranoia. In 2011, then prime minister Meles Zenawi cautiously opened the economy to China: a cluster of light industry around Addis Ababa airport has mushroomed as Chinese companies take advantage of low wages and privileged access to western markets. When the Tigray minority was replaced by a broad coalition of the two major ethnic groups, led by Abiy Ahmed, deeper economic reforms were embraced. Moving to a market-based exchange rate is the latest — crucial — phase.

It is noteworthy that, while decisively important for investors, this is only the latest step in a sustained homegrown economic strategy. And it matters because Ethiopia is already a large economy. Its rapid growth suggests that within a decade it will be a major new attraction for FDI. Irrespective of whether European and American investors arrive, Gulf, Indian, East Asian and Turkish companies will drive the economy forward.  

Until this week, throughout the period of successful homegrown growth, the IMF and World Bank marginalised themselves by their insistence on linking cheap finance to accepting their policy advice. Whereas other African governments were willing to promise any conditions that enabled the government to spend in excess of taxation, the preservation of autonomy has been a constant across Ethiopian regimes.

In my view this is right: the case for access to finance from the fund and the bank is still the one recognised when both institutions were founded in 1944. Regions like Africa now need de-risked finance and public investment to facilitate catch up. The Ethiopian government was courageous in holding out until the staff of the fund and the bank were given the freedom to judge whether Ethiopia was serious about reform. As many staff knew, Ethiopia has long met the key conditions, namely that a government should genuinely be trying to improve the lives of its people and have a strategy for doing so. The government was also implementing the key step of exchange rate liberalisation before any deal was signed. Quite properly, albeit belatedly, the boards of the fund and bank have now approved the finance. 

Fifty years ago, Zambia was by far the most prosperous society in liberated black Africa, neck-and-neck with Chile, the other major copper exporter. But unlike Ethiopia, until recently its economic management was poor. Decisions were made by a corrupt political class in Lusaka, where political power alternated between the two largest ethnic parties. Meanwhile, the real economy in the Copperbelt and agriculture were woefully neglected.

Despite these deficiencies, the bank and fund were content to lend to any government based on incredible promises of reform, leaving the country highly indebted to China and international financial institutions. In 2021, Hakainde Hichilema (HH), a technocrat from a minor tribe, swept to power on a tidal wave of youth votes and a commitment to devolve decision-making to localities. Shamefully, the IFIs and China spent the next three years wrangling as to whose debts should have priority: both had lent irresponsibly and deserve deep haircuts.

Impressively, “HH” built a team of competent ministers and advisers and crafted a programme of deep economic reform. The opposition parties detest each other more than him, so he is likely to be in power for the next seven years, with a legacy of visible progress in rebuilding the economy. A successful Zambia of more than 21mn people, with major assets of natural resources and the Victoria Falls, can be the role model for the transitions needed elsewhere in the region. As in Ethiopia, the staff of the IFIs need the freedom to judge Zambia’s homegrown reforms delinked from imposed conditionalities that cloud the intentions of its government: the busted game of extracting promises is unnecessary.