Ethiopia - Economy Role of Government

Role of government

The imperial government presided over what was, even in the mid-twentieth century, essentially a feudal economy, with aristocrats and the church owning most arable land and tenant farmers who paid exorbitant rents making up the majority of the nation's agriculturalists. Acting primarily through the Ministry of Finance, the emperor used fiscal and monetary strategies to direct the local economy. The various ministries, although not always effective, played a key role in developing and implementing programs. The government conducted negotiations with the ministries to allocate resources for plan priorities.

Officials formulated actual operations, however, without adhering to plan priorities. This problem developed partly because the relationship between the Planning Commission, responsible for formulating national objectives and priorities, and the Ministry of Finance, responsible for resource planning and management, was not clearly defined. The Ministry of Finance often played a pivotal role, whereas the Planning Commission was relegated to a minor role. Often the Planning Commission was perceived as merely another bureaucratic layer. The ultimate power to approve budgets and programs rested with the emperor, although the Council of Ministers had the opportunity to review plans.

After the revolution, the government's role in determining economic policies changed dramatically. In January and February l975, the government nationalized or took partial control of more than l00 companies, banks and other financial institutions, and insurance companies. In March l975, the regime nationalized rural land and granted peasants "possessing rights" to parcels of land not to exceed ten hectares per grantee. In December l975, the government issued Proclamation No. 76, which established a 500,000 birr ceiling on private investment and urged Ethiopians to invest in enterprises larger than cottage industries. This policy changed in mid-1989, when the government implemented three special decrees to encourage the development of small-scale industries, the participation of nongovernmental bodies in the hotel industry, and the establishment of joint ventures.

Under the Provisional Military Administrative Council (PMAC; also known as the Derg), Ethiopia's political system and economic structure changed dramatically, and the government embraced a Marxist-Leninist political philosophy. Planning became more ambitious and more pervasive, penetrating all regions and all sectors of the society, in contrast to the imperial period. Article ll of the l987 constitution legitimized these changes by declaring that "the State shall guide the economic and social activities of the country through a central plan." The Office of the National Council for Central Planning (ONCCP), which replaced the Planning Commission and which was chaired by Mengistu as head of state, served as the supreme policy-making body and had the power and responsibility to prepare the directives, strategies, and procedures for short- and long-range plans. The ONCCP played a pivotal role in mediating budget requests between other ministries and the Ministry of Finance. The government also sought to improve Ethiopia's economic performance by expanding the number of state-owned enterprises and encouraging barter and countertrade practices.

On March 5, 1990, President Mengistu delivered a speech to the Workers' Party of Ethiopia (WPE) Central Committee in which he declared the failure of the Marxist economic system imposed by the military regime after the 1974 overthrow of Emperor Haile Selassie. He also announced the adoption of a new strategy for the country's future progress and development. Mengistu's proposals included decentralization in planning and a free-market, mixed economy in which the private and public sectors would play complementary roles. The new strategy would permit Ethiopian and foreign private individuals to invest in foreign and domestic trade, industry, construction, mining, and agriculture and in the country's development in general. Although Mengistu's new economic policy attracted considerable attention, many economists were skeptical about Ethiopia's ability to bring about a quick radical transformation of its economic policies. In any case, the plan proved irrelevant in view of the deteriorating political and military situation that led to the fall of the regime in 1991.

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