Interview—“I have never heard of any convincing reason as to why we should privatize land”

The Reporter (Addis Ababa), 3 May 2000

Addis Ababa—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. y 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.