have never heard of any convincing reason as to why we should privatize land"

I have never heard of any convincing reason as to why we should privatize land"

 

                              The Reporter (Addis Ababa), May 3, 2000

 

                              Addis Ababa - Interview - "I have never heard of any truly convincing reason as to

                              why we should privatize land." - PM Meles

 

                              Last Friday, the Prime Minister of Ethiopia, Mr. Meles Zenawi, responded to

                              questions and remarks by a panel of distinguished Ethiopians pertaining to issues

                              that relate to the socio-economic performance of the country during the past eight

                              years. The panel, which included Dr. Abdul Mejid Hussien, Sheik Mohammed

                              Al-Amoudi and Mr. Ermyas Amelga, asked questions and made remarks on the

                              land ownership issue, unfair taxation system and "disincentives" to the industrial

                              sectors of the country. Here are excerpts.

 

                              Question by Mr. Abdul Mejid Hussien: I am interested in the land tenure and land

                              utilization issues. During the past days, presenters posed the question of the need

                              to change the current land policy. Others also raised similar questions. The

                              changes suggested range from, as one has put it, more secure individual user

                              rights over the land they hold, the right to mortgage, exchange, loan or sell to

                              making land a commodity which should be bought and sold. Some also contend

                              that if there is any area, Mr. Prime Minister, where the government and EPRDF,

                              would never think of ever reviewing its policy, it is over the land issue. Yet I also

                              know that your government and party is well-known for also going the extra mile if

                              that serves the interests of the people. Mr. Prime Minister, I would like to ask this:

                              is the land policy of the government a holy cow that can not be touched? Meles:

                              Now, with regard to the land tenure system in Ethiopia, we would like to believe

                              that we, in the government and EPRDF, do not have any "holy cows." We do have

                              principles, values of course. But we do not have holy cows. I believe that applies to

                              the land questions too. Because of our principles and values, we believe there

                              should be a fair and equitable distribution of natural resources assets of this

                              country. And therefore the equity and the facts of our land policy you might call as

                              the political cum ideological aspect of it.

 

                              But at the same time we do not have any illusions as to what land ownership can

                              do to the peasant farmer over the long-term. We do not believe that the long-term

                              future and destiny of our peasant farmers is to be stuck in the mud, so to speak.

                              We feel that ultimately there has to be industrialization, ultimately these people

                              have to find to get employment outside agriculture.

 

                              And to the extent that does not succeed, then land ownership alone will not go far

                              enough.

 

                              Now we have, as I am sure all of you know, rejected the concept of changing land

                              into a commodity in Ethiopia. We feel that this choice in our context is not

                              economically rational. That is why we don't accept it. Why do we think it is not

                              economically rational? By fully privatizing land ownership, one starts the process

                              of differentiation. The creative, vigorous peasant farmer gets to own larger pieces of

                              land and the less effective get to be left to live in doubt. And that is supposed to

                              improve agricultural production and productivity in Ethiopia. We beg to differ on this

                              issue. We do not believe this is the right approach in our country. And we have a

                              number of reasons.

 

                              First, lets assume that if we allow land ownership, the private land owners would

                              automatically be the vigorous farmers. It is simply assumed that those who would

                              buy land would be the very ones who would use it best. We do not know of any

                              logic or evidence to prove that.

 

                              On the contrary, experiences in many countries seem to suggest that, in the type

                              of the economic environment that the businessman among the panel was

                              describing, the most likely outcome is that land would be one element in the

                              overall speculative environment of the economy. That, it should open the road for

                              land speculation and that we believe would be a mis-allocation of resources.

 

                              We believe that those who are wont to buy the land are not those who necessarily

                              would use it themselves but perhaps lease it. In that, it introduces the question of

                              land rent and some economist believe that this again results in mis-allocation of

                              resources.

 

                              Now, even if these were not true, even if there was no land speculation or that land

                              rent is to be an instrument of efficient allocation of resources, we still believe that

                              private ownership of land, which is in effect consolidate land ownership, is not the

                              right way in Ethiopia.

 

                              Why? Because we feel that the primary resource we have in abundance is labor.

                              And the central agenda in agricultural development at this time in our country is

                              not primarily to improve the productivity of labor but to improve the productivity of

                              the land by employing more and better labor for every piece of land. Our

                              agricultural growth has to be intensive in the utilization of labor. By displacing labor

                              from these pieces of land, consolidating land, using modern agricultural techniques

                              and instruments clearly the productivity of labor which remains on the land will be

                              improved significantly. We have no illusion about that.

 

                              But capital is not a resource we have in abundance. Labor is. Then we have to

                              have a farming system that utilizes labor most effectively, most intensively and

                              most efficiently. By making sure that those who are able to work on land have

                              access to land and by assisting this labor to improve its agricultural practices and

                              by providing other services including extension services, we feel we would be using

                              our resources more efficiently than if there was to be privatization, consolidation of

                              land, and therefore, perhaps improvement of labor productivity.

 

                              So, from our point of view, the rational thing to do is to enable these [people] who

                              are willing to work on the land, to ensure access to the land to those people and to

                              provide technical assistance and training.

 

                              Now what is to happen if there was consolidation of land through privatization?

                              Clearly a good number of those who are working on the land now would have to be

                              shifted from agriculture to other endeavors. We do not believe that we have the

                              type of those that would allow us to shift in big numbers to make consolidation

                              possible, without a major social disruption and social explosion.

 

                              Even if we are to do that, we will be creating a large unemployed and perhaps

                              unemployable sector. That would be a mis-allocation of resources. We would be

                              mis-allocating the abundant resource we have, labor. We would be displacing it

                              from the land. If it is not employed in agriculture, we will not be able to provide it

                              with an alternative employment. And therefore, that key resources of ours would lie

                              idle if there was to be privatization of land, ownership and consolidation.

 

                              That is why we feel that this is not economically rational. And that is why we are

                              not particularly interested about this approach. Although I must say that quite a

                              number of respected institutions and individuals have proposed this to us. I have

                              not heard of any truly convincing reason as to why we should privatize land

                              ownership at this stage. I have not heard of any economic rationale for doing so. If

                              there were to be an overwhelming economic rationale to do it and ultimately that

                              would be the best way of securing the interests of our peasant farmer and therefore

                              politically that would be our agenda.

 

                              If, on the other hand, providing secure user rights to the peasants is the best way

                              forward for those peasant farmers we could necessarily be at the front of the queue

                              also. So, if there is any "holy cow," Abdul Mejid, that holy cow is that we try to

                              seek to protect the interest of the vast majority of our people on every policy issue,

                              including the land policy issue. What makes the most sense to those peasant

                              farmers is what makes the most sense to us. And that is what we protect and

                              support.

 

                              That leads us to the second aspect of this land issue, i.e. the security of user

                              rights. We truly agree with those who suggest that for those peasant farmers that

                              have access to land to invest whatever they have on their land need to know that

                              they would continue to have access to this land on a long-term basis. We accept

                              that this is necessary and important.

 

                              In our own way, we feel that we have done that, perhaps in a way that is slightly

                              different from the ways some other countries have done it by suggesting that those

                              peasant farmers that have access to that particular piece of land. They have

                              access to it, in effect, in perpetuity, because they have the right to pass on that

                              land to their offspring by way of inheritance. We assume that is as much user

                              rights security as one can get.

 

                              Of course, there are various choices. One can give secure user rights for five, 15 or

                              40 years. What we have done is to provide this security in perpetuity. But there is

                              a qualification here. The qualification is while on one hand giving the peasant

                              farmer permanent access to this land, we are also reserving the right of the

                              government to redistribute land if necessary. Why do we have this provision? We

                              have this provision not because we believe we should redistribute land every five

                              years, 10 years or even every fifteen years. Frequent redistribution of land is not

                              our agenda. The reason why we are reserving this right is: First in the short-term,

                              there may be instances of land allocation that are totally unfair and in some

                              instances may be economically irrational and there are some instances in some

                              parts of our country.

 

                              There are peasant farmers who have access to significant tracks of land that they

                              cannot use themselves and therefore they lease it out to others.

 

                              Because it is too big a chunk for them to use in their own family labor, this would,

                              in effect, be private ownership of land or would have the consequence of private

                              ownership of land. And we may wish to correct that.

 

                              But even in such cases, we have to balance the impact of improving the fairness of

                              such land allocation and contrast it with the impact that land redistribution might

                              have in the feeling of security of the rest of the peasant farmers.

 

                              So, although we have reserved that right to ourselves, we have preferred to be very

                              cautious in terms of using it, because we are worried about what its impact might

                              be on the feelings of user rights security of the peasant farmers.

 

                              Now the second reason why we would wish to reserve this right for ourselves is in

                              case we have the best scenario of agricultural development in our county or the

                              nightmare scenario. In the best scenario, what would happen is that agricultural

                              productivity would improve in non-farming employment both in the rural and in

                              urban areas would increase tremendously and this would attract labor out of

                              agriculture to non-agricultural activities.

 

                              Now we clearly recognize that the time for the rural Ethiopia to be primarily

                              populated by old people, women and small children, if it is ever going to happen in

                              Ethiopia, it is in a very distance future.

 

                              But we would like to hope and believe that much of the labor in agriculture can be

                              diverted to non-agricultural activities. The improvement in agricultural productivity

                              would provide the ground to it because fewer farmers would be able to feed all of

                              us. The growth in non-agricultural activity would provide for it because it will provide

                              alternative employment more meriting our peasant farmers, and therefore the

                              pressure on land would continuously decrease.

 

                              At that stage, it is possible that we would have fewer hands to work the land and

                              land consolidation may be necessary. That type of land consolidation is, of course,

                              the best case scenario for us. We would like to reserve our right to promote such

                              land consolidation without privatization through redistributing to the able-bodied

                              persons in the rural areas that remain behind. Therefore, giving them bigger chunks

                              of land, because there would be fewer hands requiring it. So in the long-term future,

                              we would like to reserve that right if it becomes necessary.

 

                              In the nightmare scenario case, what we would have is agricultural productivity and

                              non-farming employment would not increase significantly.

 

                              New mouths to feed will obviously crop up in the rural areas in big numbers.

 

                              They will have no access to non-farming employment because it is not being

                              created in enough numbers. If they were to have redistribution, they will have no

                              access to any means of sustenance. That is the scenario that we dearly hope

                              would never happen. But if it does, we would not want to close doors that we could

                              use to alleviate that problem on temporary basis.

 

                              Because we know that it is not going to be a long-term solution. So, it is for these

                              perhaps unlikely scenarios that we reserve governmental right to redistribute land

                              and to allocate un- utilized land.

 

                              Has this significantly affected the confidence of the farmer in his right to use that

                              land in perpetuity? My information does not suggest that. But it so happens that a

                              World Bank official came to our country to study this very issue and he seemed to

                              suggest from preliminary study that this may be indeed the case. But that is only

                              a preliminary study. If some one was to come up with concrete and overwhelming

                              evidence that the user right security which we think we have guaranteed is not

                              there, then obviously we would have to seek ways of ensuring to find other ways of

                              securing this user rights.

 

                              So while we are not contemplating the possibility of changing our land policy in

                              terms of turning it into a commodity, and this is not only for primarily political

                              reasons, but because we do not think that the alternative is economically rational.

                              We do not close the opportunities for improving upon the guaranties that we have

                              provided to our peasant farmers in terms of user rights security.

 

                              Question and proposals by Mr. Ermiyas Amelga: Your excellency Mr. Prime

                              Minister, as a representative of the Ethiopian private sector, I would like to raise

                              what I believe is a central issue in the development of the industrial base in

                              Ethiopia. I think we all believe it is a necessary element to the overall economic

                              development of this country. In so doing, I beg of your indulgence in giving me two

                              minutes to providing some context to the question I would like to ask.

 

                              There is no doubt that there is great progress in improving the overall

                              microeconomics situation in Ethiopia over the past nine years. This fact has been

                              aptly demonstrated with fact and figures over the part two days.

 

                              Inflation is under control, interest rates are low, the exchange rate, by standards of

                              most African if not most developing countries, has been fairly stable although

                              depreciating gradually.

 

                              It is clear we have made this progress, mostly on our own terms and in our own

                              way and it is also understood that all these were not built in one day, one year, nor

                              in 10 years. It takes generations to build a nation.

 

                              But the question is: Could we not do better? Could we not do more and go a little

                              faster? If there is ever a question I would like to raise (if we have agreed that we

                              have achieved an admirable level macroeconomics stability that is conducive to

                              investment) is why we are not seeing the kind of accelerated growth in productive

                              capacity that we are led to expect given such a favorable macroeconomics

                              environment? Is the Ethiopian businessman or woman incompetent or do we not

                              recognize a good investment opportunity when we see one? I could like to propose

                              and this is what I would seek your comment upon. There are some

                              microeconomics issues which are critical that need to be addressed to translate

                              into accelerated growth in the industrial sector. I believe that Ethiopia has its full

                              share of very smart and competent business people recognizing a good investment

                              opportunity and a good profit opportunity when they see one.

 

                              The problem I think is these smart business people make rational decisions and

                              most of them have decided to be traders, as opposed to industrialists.

 

                              And I would propose this is a very rational decision. Industrial investment in

                              Ethiopia requires extensive but difficult to acquire infrastructure, land, power,

                              trained manpower, technical know-how project financing and so forth. The returns

                              are long-term, the investment is in liquid, project financing is difficult to secure.

                              And the tax regime, although much improved, is very burdensome.

 

                              Investing in trading activities, on the other hand, requires minimum infrastructure -

                              a warehouse, an office and may be a store at most. The returns are quick and

                              high. Merchandise loans are more readily available than project financing. The tax

                              regime has been, until very recently, very favorable to importers and somewhat

                              unfavorable to local producers.

 

                              As I see it, the problem we have with regard to industrial growth and development

                              is that we have yet to address the critical operational and policy related issues that

                              relate to macro, microeconomic business environment.

 

                              To cite one example to clarify my case, it is true we have very low interest rates by

                              standards of most African countries if not most developing countries. But what we

                              hear from most people in industry is how difficult it is to get financing. The reason

                              given is that bank lending policies are extremely restrictive. I understand that

                              banks need to be prudent but I venture to say that the level of bank lending and

                              bank borrowing would not change much if interest rates were five percent or 15

                              percent, because the financing for most projects and investors that want to get

                              involved in industry is difficult to come by.

 

                              Your Excellency, the question that I would like to hear your views on is given the

                              many advantages that trading enjoys over industry in Ethiopia and given our stated

                              desire to encourage industry, do we not need to do substantially more in terms of

                              creating an industry-friendly microeconomics business environment? I am referring

                              to things such as a more aggressive taxing structure, encouraging more flexible

                              but still prudent landing policies, or more broadly, encouraging the growth of capital

                              markets to the efforts of the National Bank and even such issues as providing free

                              or at least very inexpensive land for factories. It is about addressing many of the

                              microeconomics issues that once we get outside the macro picture, that people

                              should want to get involved in productive investment have to face.

 

                              Meles: With regard to the question of creating appropriate microeconomics

                              environment for industrialists in our county I tend to agree with much of your

                              analysis, Sir, despite some advises to the contrary. We have never believed that

                              creating a stable macroeconomics environment is the beginning and the end of all

                              economic policy.

 

                              It is just the beginning, creating a stable, predictable environment for businessmen

                              so that they can plan ahead. That is not even a holy cow as far as we are

                              concerned. It is a necessary condition. Some macroeconomics stability, we

                              believe, is necessary for industrialists like yourselves to be able to plan ahead. At

                              the same time, you can have a predictable, stable environment that is not

                              pro-growth. So we would like to have a macroeconomics environment that is not

                              only stable but also conducive to growth, particularly industrial growth. We feel we

                              have gone far enough in that direction. It does not mean that there are no need for

                              improvement.

 

                              I can mention some of our particular area where there is need for improvement.

                              And that is our tax system, not so much in terms of the rate. I think our tax rates

                              are not high by global standards. The marginal rate as far as I know is some 35

                              percent, except for the excise tax, of course. To that, I will come back later.

 

                              But our tax system, especially our revenue collection system, is such that it can

                              only tax those that are very clearly visible, the industrialists. It is not able to tax

                              the type of people you are mentioning that are having a field day now, the difficult

                              to tax sector.

 

                              So, in effect our tax system is a disincentive to the industrialists, and an incentive

                              to the other sectors that you mentioned, although the tax rates are equal for all.

 

                              Nevertheless, because that sector is not being taxed, while the industrialists are

                              being taxed, there is clearly a disincentive here. So we would like to have an

                              effective tax collection system that would tax everybody effectively; and therefore

                              that would allow us to use the tax rates as an instrument of promoting industrial

                              development.

 

                              At this stage, it is not possible to effectively use the tax system. Because the

                              non-industrials by and large do not pay any taxes, not because they are not

                              supposed to pay, but because of the tax collection system is such that they do

                              not actually pay.

 

                              But having said that, much of the problem lies in the microeconomics area, in the

                              area of institutional reform, in providing infrastructural services, utilities, and in

                              partnership between government and the industrial sector for common purpose of

                              creating a viable, internationally competitive industrial sector in our country.

 

                              Here is one area where we differ. With much of received wisdom in the international

                              financial institutions, this is an area that we intend to work on over the next five

                              years. We have a draft plan for the next five years.

 

                              Among other things, we feel we need to establish a closer, more structured

                              partnership with the private sector in general, and industrialists in particular.

 

                              We propose that through this partnership, the government and the private sector

                              should cooperate to promote industrial development in this country.

 

                              The government could assist in particular in manufactured exports, marketing,

                              manpower training, providing utilities and financing all the areas that businessmen

                              have to have. We feel that the government can make a difference by supporting.

 

                              And so I am very glad that we have at least one businessman who appears to be

                              perfectly prepared to benefit from this situation, from this policy and is very willing

                              to work together with the government for the improvement of industrial development

                              in our country.

 

                              I have to say I agree with you. We are trying to address it. It is not going to be very

                              easy. It not going to be very popular with some of our friends. Nevertheless,

                              because we think this is the future of our country, we have to do it and hope that in

                              the end our friends would understand.

 

                              Question and remarks by Sheik Mohammed Al-Amoudi: Please forgive me. I am

                              born from two societies. Therefore I can only talk either in Amharic or in Arabic.

 

                              Your Excellency, Mr. Prime Minister, if I had known that there was this kind of

                              opportunity I would have come here a week ago. So, when I get this opportunity, if I

                              was to cite all the problems, a month would not be enough.

 

                              But I have to give the others the opportunity [therefore I will restrain myself.]

                              Because the taxation is [high], it is not allowing to implement our programs and we

                              could not to forward with the things we produce.

 

                              When I look at some of the things here, we are really at an amazing (surprising)

                              stage. For example, the excise tax has pulled us, the industrialists, backward in

                              many things. It has made investors to retreat and discouraged others from

                              investing.

 

                              I can give you two examples. While excise tax on alcoholic drinks and tobacco

                              has decreased, soft drinks, those that our children drink, has not been decreased

                              until now.

 

                              As our report indicates, we have paid 94% of our total revenue as tax to the

                              government. If we were to borrow from the banks, another 10 percent I would have

                              to pay, another 2 percent extra to pay from our pockets.

 

                              So if something is not done about this tax issue, if there are no investment

                              incentives, it is something that drags us back, and not make us go forward.

 

                              For instance, when we bought Moha Soft Drinks from the government, we paid 115

                              million birr. We also made an extra investment of 90 million birr and another new

                              investment of 224 million birr has been made, making it a 428 million birr

                              investment. If you were to ask me what I have profited from it, it is negative, zero.

                              Then, 70 percent of the whole investment has a local component with 30 percent

                              coming from abroad.

 

                              We do so much. It is for the government. If 94 percent is paid to the government,

                              where are we to put the 4 present? So how do you see this and what is going to be

                              done in the future? Meles: The question about taxation, that of especially excise

                              tax on soft drinks, the best person placed to answer the question is Ato Sufian

                              Mohammed [Minister of Finance]. But since he has kept me informed, as I am

                              sure all of you in the sector also kept me informed by writing letters.

 

                              Now, the story is we have a very high excise tax on all sorts of drinks and tobacco.

                              The Finance Minister comes and tell us that this is not the best way to go about it.

                              That we should reduce the excise tax. But being a Finance Minister, he also

                              comes up with the idea that in so doing, we should not reduce government

                              revenues.

 

                              So, we say how do we square this? He suggests we promise ahead of time to the

                              private sector that we are going to reduce the excise tax by so much, so that in

                              their investment planning, they would know that over a certain period, or after

                              certain things happen, excise tax would come down an therefore their businesses

                              would be liable.

 

                              By announcing our intention to reduce excise taxes ahead of time, we would be

                              promoting investment. By reducing the excise tax, when these investments

                              materialize and start producing, we would be reducing the excise rate. But we

                              would not be reducing the overall government revenue. That was the logic.

 

                              So we got to reducing the excise tax on beer at the beginning of the current budget

                              year. With regards to soft drinks, technically speaking, the requirements of that

                              provision are not fulfilled. But we are not particularly keen to be precise about the

                              technical requirements. It is also true that this is not a year when the Ethiopian

                              government could be, shall we say, adventurous about its revenues. So that too

                              had something to do with the fact that we are not able to reduce the excise tax for

                              soft drinks.

 

                              Nevertheless, I can promise Sheik Al-Amoudi that our Finance Minister in his

                              preliminary proposals for our budget for the next year does in fact consider the

                              possibility of reducing the excise tax by some 80 percent.

 

                              I don't know if that adds up to the 90% of the income of your enterprise. I suppose

                              that much of it would be paid by the consumer. Nevertheless, we feel that this is a

                              drag. That is why we promised several years ago that we would reduce it, if certain

                              conditions are fulfilled. But, we are considering the possibility of reducing the

                              excise tax over the next year.