Risk taking behavior: Another look at the Ethiopian economy
By Tigabu Molla Meresa†
August 05 2010
Economic analyses of growth have bewared that sustainable economic growth has been incumbent upon the level of technological development; which has also been the source of divergence in economic strengths and growth rates between countries across the world. The technological breakthrough that steered the Industrial Revolution and its lasting effect on the global economy is one such triumphs of technology. For it is the main source of productivity increase, a failure to maintain a continuous technological progress would precipitate long-run growth to grind to a halt. So how to drive and sustain technological progress has been the nub of questions around economic growth.
The steering wheel of this engine of growth is primarily Research and development (R&D) effort. Yet R&D is a risky activity, involving not only how much to invest but also how to invest. The amount of resources it requires and the uncertainty of its pay-offs makes it a risky strategy. Firms and other agents like governments that have, whatever happens, continually committed unflagging endeavor to R&D have been marks of economic success. In other words, risk-taking behavior has been the thrust of sustained growth through out the world. Economic records also show that the level and rate of economic growth has been dependent on the level of risk-taking behavior; that is, large firms have been the main sources of R&D and hence, technological progress. This is because large firms have more resources to invest than small firms, enjoy economies of scale and scope in undertaking R&D, and the chance to spread the risks from R&D. What does this mean to Ethiopia? How can it sustain its growing economy? This is a fundamental question given the culture of risk-taking behavior, resource availability, size of the private sector and political foundation of the country.
Needless to say, in all economic measures Ethiopia, despite being one of the fastest growing economies, is still an economically poor country, epitomized by low per capita income, an infant private sector, and low level of monetization. Income level is the main factor determining the level of risk taking. So it is expected that the level of risk taking behavior in the country is very low. There is also another reason, probably equally critical when we consider Ethiopia, which has for long stifled the risk-taking level: I shall call it the cultural-trap – the trap due to our culture of excessive reservedness and cautiousness, shaped by the long and heavy hands of various faiths, and past organizing systems. We see even the relatively affluent Ethiopians or private firms not engaging in risky but potentially rewarding productive activities. We have been for ages scared away from and let the gate to growth locked. In short, our low level of risk taking behavior or risk-averse nature has left our growth track at a lower level or even in economic doldrums.
This reality poses an important question: who can unlock this gate and up our growth track?
The only possible home-grown candidate we are left with is our government. Its sheer size and the corresponding advantages, and its ability to muster more resources makes the government the viable option. It can embark on risky projects – projects mainly in areas of agriculture using irrigation, and other physical sciences - that require high-fixed costs that may not be profitable in the short run and attractive to the private sector. There is also a stronger case for a strong government involvement in the economy: the country’s political foundation. The country has only recently emerged to rectify the longstanding internal problems via ethnic federalism – the system that not just helps bring about equivalent economic, political, social and cultural footing in an ethnic diverse country but also effectively equilibriumize its internal and external political forces ( this is a topic beyond this article). Now assume that there is a strong private sector and a minimal government involvement. Since private firms aim at maximizing their profit, they concentrate in areas where profits are reaped, leaving aside unsuitable-seeming areas. In other words, there are investment activities that are made only out of political considerations to promote the doctrine of equivalent footing and hence general investment attractions. Yet these considerations are out of the profit equations of private firms. Therefore, to let this happen impairs not only our growth track but also our existence – chickens will come home to roost. This is also why we need a strong government participation in the present Ethiopia. Any attack against a government involvement in today’s Ethiopia context can be no more than an economic nonsense.
The role of government is the main wedge issue in the world – how much intervention is optimal or if we need it in the first place will remain the major dividing issue, especially considering the recent success of state capitalism in countries like China and the shakiness of unfettered invisible hands. For countries like present Ethiopia, its role can’t be compromised.
Does that mean that we don’t need a strong and vibrant private sector? Absolutely not. Given the reasons I mentioned earlier, at the current state the private sector is not in a position to open the gate. So the government should help unlock that, while at the same time helping build up the capacity of the private sector so that in the long run the latter can take over the driver’s seat. Yes in the long run when we will have ensured equivalent footing, when individual interest will have replaced group interest by a strong economy and competitive environment. Policy measures that foster R&D in the private sector may include direct subsidization of R&D by firms, patent protection, interfirm agreements regarding R&D and cultural reversal, (while maintaining some of our good cultural values), through the development and flow of information.
† The writer, Tigabu Molla Meresa, is a student of Health Economics, Policy and Management. University of Oslo, Norway.
Ethiopia a country in a fast track