By Daniel Teferra (PhD)*

The developmental state paradigm espouses an anti-market, anti-capitalist ideology, arguing in the tradition of Nyerere’s “ujamaa”, Nkrumah’s “consciencism” and Marxian socialism, all advocating for a statist, command growth model rather than a free market system.  However, the experience of the former soviet bloc countries and China have illustrated that command growth is possible for short periods, even decades, but cannot be sustained for a long period of time. Although the command growth model initially helped promote a rate of economic growth more rapid than would likely be possible in a market economy, it failed ultimately to meet the changing economic needs of the society.[i]

The developmental state paradigm, itself an off-shot of the statist, command growth model, asserts that the state should play a critical role in what it calls social capital accumulation, essential for economic development.  According to the paradigm, social capital accumulation is a public good, undersupplied by the market.

The real issue in economic development is not whether the market is efficient or undersupplies public goods. The developmental state model tries to address the question of economic development using analytical tools of welfare economics.  However, the study of economic development is beyond the range of welfare economics, which simply studies how to evaluate the efficiency of resource allocation for an economy or for a particular market structure within an economy.  Emphasizing what it calls market failures to fit its own argument in favor of a state-controlled economy, the developmental state paradigm fails to understand the central role that the profit motive in the marketplace plays to achieve continuous technological advances and economic development.

This paper argues that economic development cannot be based on other than a free market system.  The key and essence to economic development is increasing labor productivity, which in turn depends primarily on continuous technological advances.  Technological advance is not self-willed; it is to a large extent imposed by competition for profit in the marketplace.  Consequently, society thrives on modern technology as the capitalist producer is forced by the profit motive to try newer and newer production techniques.[ii]

The so-called developmental state paradigm, on the other hand, does not possess inner laws of economics that can compel persistent technological advances and economic development.  It is the same socialist or command growth model that relies primarily on state ownership of the means of production and centralized decision making.  The developmental state paradigm, therefore, is not a new or modern idea.

This paper will first discuss the origins of the statist or socialist model in Africa, in general.  It will then provide a critical analysis of the developmental state paradigm and discuss the rationale for and barriers to transition to a market system and economic development in Ethiopia.  The paper will finally assess the economic future of Ethiopia.

  1. The Socialist Paradigm

The intellectual origin of the statist paradigm in Africa was Julius Nyerere of Tanzania.  In the writings of Nyerere, capitalist accumulation is condemned.  Nyerere advocated what he called African socialism for technological change and economic development in Africa.

Nyerere said that Africans must return to their traditional attitudes and values.  According to Nyerere, African socialism is based on “Ujamaa,” family-hood.  The cornerstone of African socialism is the extended family.  He said that in the extended family, all men are regarded as brothers and the society is an extension of the basic family unit.

“In the African society,” Nyerere wrote, “We were individuals within a community.  We took care of the community and the community took care of us.  We neither needed, nor wished to exploit our fellow men. Then colonialism introduced capitalist attitudes and values.  Capitalism seeks to build a happy society on the basis of the exploitation of man by man.”[iii]

Nyerere stated that the production of wealth, whether by primitive or modern methods, requires three things: Land, labor and tools.  Land is given by God.  Labor created tools and produced wealth.  In a traditional African society, everybody was a worker.  There was no other way of earning a living for the community.

In the olden days, Nyerere argued that the African had never aspired to the possession of personal wealth for the purpose of dominating any of his fellows.  He had never had laborer or factory hands to do his work for him.  But then the foreign capitalists, who were wealthy and powerful came.  And the African naturally started wanting to be wealthy using the capitalists’ methods and attitudes.

A true African socialist, according to Nyerere, demands only a fair return for his work in proportion to the wealth or poverty of the whole society to which he belongs.  If he takes a greater share of his profit than he actually needs, he will reduce his contribution to the total income; consequently, he is exploiting his fellow human beings.

If we look further back in history, we will find that Nyerere was not alone in condemning profit-seeking and accumulation of wealth.  Pre-classical and medieval thinkers were also opposed to profit seeking until the rise of the capitalist system in the eighteenth century provided the temper of a business-like world, whereby profit-seeking was respected and wealth was to be accumulated and put to good use, not squandered.

For Nyerere, capitalism is synonymous with colonialism.  Consequently, he failed to see the essential role that a capitalist plays in increasing society’s income.  He thought that if the capitalist’s share of profit rises, total income will decline.  This is not necessarily true.  A capitalist system is not a zero sum game.  An increase in profit does not make someone else worse off.  As the capitalist’s share rises, so will the shares of others. The capitalist saves and invests his/her profit in new production techniques, thereby increasing the society’s total income.  A communal system, on the other hand, is an anti-profit, non-innovational system; and consequently, it cannot ensure an increase in total income.  In fact, as population increases, average income in a communal system will decline, resulting in a starvation and famine in the long-run.

Nyerere’s contemporary, Kwame Nkrumah of Ghana also argued in his “Consciencism” that traditional communalism was the natural ancestor of modern socialism.[iv]  He said that the traditional face of Africa is socialist-egalitarian view of man and society; there was no sectional interest but only the welfare of the people.  Nkrumah too believed wrongly that colonialism changed all this.

According to Nkrumah, colonialism infected the African society with capitalist ideals through its economic, political and social activities.  He said that capitalism is guided by the profit motive; and consequently, it is an exploitative system.  Under capitalism, happiness is limited to the few and denied to the many.  He argued that this is incompatible with the basic principles of the traditional African society. For Nkrumah, capitalism is unjust, complicated, alien and unworkable in Africa.  He said that capitalism at home is domestic colonialism.  Socialism, on the other hand, is not directed toward a profit-seeking goal but toward providing the majority with ever-increasing material and spiritual satisfaction.  Socialism, therefore, according to Nkrumah, is the defense of the principles of African communalism in a modern setting.  Africa requires socialism according to Nkrumah in order to restore its humanist and egalitarian past.  He stated that socialism ensures the highest development for Africa.

Nkrumah like Nyerere exaggerated African communalism and confused colonialism with the capitalist system.  He did not examine whether African values were compatible with   the imperatives of economic development.  In fact, African values are tradition-bound and anti-change.  Furthermore, Nkrumah presented an ideological argument by equating profit-seeking with exploitation and espousing socialism for African development.  He did not, however, explain how socialism was non-exploitative and how it could ensure the highest development for Africa.

Another nationalist intellectual, Frantz Fanon also in his classic work, “The Wretched of the Earth,” preferred socialism to capitalism for African development.[v]  Fanon wrote that capitalist exploitation, cartels and monopolies are the enemies of the underdeveloped countries.  He argued that the choice of a socialist system, completely oriented toward the people as a whole and based on the principle that man is the most precious of all possessions, will allow Africa to go forward more quickly and more harmoniously; and consequently, it will make impossible a society where all economic and political power is held in the hands of the few.  Here too the trouble is that Fanon like his two predecessors made simplistic assumptions without checking how a socialist system makes it possible for Africa to grow more quickly and harmoniously.

Marxist theoreticians concerned with Africa’s development are also opposed to the profit motive and argue that the development of African societies is hampered by the present pattern of world and domestic economy.  They assert that profits are being drained away by overseas firms or consumed by self-indulgent domestic elite.  Generating a larger surplus by a mobilized peasantry is discouraged.  Therefore, they say that socialism is a historical necessity for African development.  They state that a viable socialist strategy in Africa must involve itself in creating and strengthening a genuine workers’ and peasants’ state and in disengaging from international capitalism.[vi]

Some Marxists even insist that the underdeveloped world cannot just take the capitalist model—with its uneven development of civilization—it is obliged to surpass it.  So they argue that the underdeveloped world must completely revise the capitalist model of resource allocation and reject the rules of profitability.  They state that the market rules of resource allocation must be replaced by a direct assessment of needs:  requirements in respect to food, housing education and culture.  According to them, there has to be a radical change in the direction of scientific and technological research in order to use modern techniques for the improvement of the majority of the population.

These Marxists state that capitalism is in conflict with modernization and distorts its potentialities.  Its technical revolution replaces unskilled labor, makes more leisure time available and introduces new types of work requiring very high skill.  Capitalism integrates only a minority and poses a threat of mass unemployment and increasing marginalization in the underdeveloped countries especially. There can be no conflict between growth and socialist civilization.[vii]

Contrary to the assertions of these Marxists, the capitalist system has succeeded in improving the lives of the majority of the populations in the industrialized societies.  It is true that technical revolution in a capitalist system does displace old skills and jobs, but it also creates new ones.  Marxist theoreticians have written an extensive critique of the capitalist system, but they have failed to explain how socialism can create a modern economy with high productivity. Arguing without evidence that socialism and disengagement from the capitalist system are the essential and indispensable conditions for attaining economic development, they reject the very same values and attitudes that are the basis for modern science and technology.  By assuming that direct relations with the capitalist system create unfavorable consequences to the underdeveloped countries, the Marxist theoreticians imply that keeping out of such relations will create favorable consequences. But this is not necessarily true.

Pulling out of the capitalist system is not a proven solution to the problem of economic development.  Even classical Marxism recognizes that modernization is essentially a process of the rise of a capitalist enterprise in its treatment of the emergence of modern society out of feudalism.  According to classical Marxism, “modernization was the social transformation engendered by the rise and spread of the capitalist mode of production, as it occurred in post-medieval Western Europe.  An economic revolution, the change from serf labor to wage labor as the dominant mode of productive activity, was the precondition for it.”[viii]

  1. The Developmental State Paradigm

            The developmental state paradigm is basically another statist or command growth model.  During the Cold War period, it was widely advocated that, in Africa, the state rather than the market system should carry out the task of economic development because, first, it was believed that the private sector was inadequate to carry out the task of industrialization, and second, state-run development was expected to achieve industrialization more quickly and harmoniously.[ix]  However, the so-called government-run development model impeded economic development by suppressing the private sector.

The post-Cold War developmental state paradigm advocates the same statist model for African development in guise of what it calls market failures. However, the question of economic development is not about market failures. The model tries to use analytical tools of welfare economics that are not designed for investigating the question of economic development.

Meles Zenawi, the late Prime Minister of Ethiopia, was the author of the developmental state paradigm for Africa.  According to this paradigm, economic development is a function of social development or social capital accumulation, which means creating the proper blend of norms, values and rules.  Social capital accumulation is thought to be a public good and like all other public goods it is undersupplied by the market. Thus, according to the developmental state paradigm, the state has to play a critical role in social capital accumulation by undermining patronage networks, by sanctions and socialization and promoting equity and democracy.[x]

The developmental state paradigm believes that economic development is based on creating what it calls “proper blend of norms, values and rules.” This is, however, a normative proposition that cannot be proven historically or otherwise.  Economic development is not based on a formula.  Economic development is inherent to a free market system because competition for profit in the marketplace compels continuous technological advances and economic development.

The developmental state proposition recognizes the central role that technological assimilation plays in achieving economic development.  But it argues that there are also market failures in technological assimilation.  The proposition states, “Firms take a lot of risk and incur heavy expenses to identify and assimilate foreign technology but are unable to fully appropriate the benefits of their efforts.  Newly introduced technology would not be diffused and national development would be hindered.  There is thus a fundamental market failure in technological assimilation. History of technological development shows that successful societies have developed national innovation systems that address market failures.”[xi]

It is true that technological advance is essential for economic development.  The problem of technological assimilation in poor countries, however, is the absence of a free market system. Technological assimilation requires a free market economy with a social group that can see profit in borrowing and internalizing modern technology.  It was largely the availability of such internal capabilities rather than national innovation systems that made the spread of the Industrial Revolution in the now industrialized societies possible.[xii]

The development state paradigm argues that there are even more market failures in rural Africa.  It states that agricultural prices cannot be right without nonmarket determinants. It talks about the importance of equitable distribution of rural assets for agricultural development, but it is silent on private ownership of land and ignores the land question in Africa, especially in Ethiopia.  The paradigm states, “Many African countries have small farmer dominated agricultural sectors and communal land ownership systems.  Patronage and rent-seeking in much of rural Africa has thus to do more with rural marketing and state power than landownership system.”[xiii]  This argument flies in the face of the long standing land question in Ethiopia.  Presently, all land is owned by the state in Ethiopia and peasants still work the land they don’t own, living as tenants of the state lacking the pride and security of an owner.    Private ownership of land plays an invaluable role in agricultural transformation, capital accumulation, widening of the middle class and democratization.

The developmental state paradigm claims to promote a democratic state, consisting of a coalition of different social groups.  However, it excludes the private sector from the coalition. The proposition states, “One of the defining characteristics of a developmental state is that it must be autonomous from the private sector.  It must have the ability and will to reward and punish the private sector depending on whether its activities are developmental or rent seeking.  It cannot do so if the private sector is in the coalition.”[xiv] This is an argument in favor of a one-party state, rather than a multiparty, democratic state.

In the first place, exclusion of any group from a political process is a violation of the fundamental principle of democracy.  There can be no democracy in a one-party state.  There is no democracy without a legal protection of dissent.[xv]  The exclusion of the private sector from the so-called coalition of the developmental state is consistent with the age-old discriminatory practice against the private sector by the rulers of Ethiopia.  Historically, Ethiopia’s rulers, jealous of rivalry by their own entrepreneurs, hired their own commercial agents or left the private sector to outsiders, who had to share with them their profits as bribes and gifts.

The developmental state paradigm cites Japan, South Korea and Taiwan as examples of states that have “engineered” successful market economies through land reform, education and infrastructure.  The paradigm, however, fails to espouse land reform.  Japan, South Korea and Taiwan all accorded their peasants private ownership of land in order to “engineer” successful market economies. The experiences of these three states, therefore, do not fit the developmental state model.

The developmental state paradigm argues that the former Japanese colonies of South Korea and Taiwan “had an early and successful introduction to the nature, instruments and characteristics of a developmental state. The Japanese colonial state was just as interventionist as the developmental state in Japan.  Later on when industrialization began in the colonies, it was state led with the involvement of Japanese companies as subordinate participants in the exercise.”[xvi] This is not an accurate understanding of the Japanese development experience.  In Japan, the relationship between state and business was (and still is) as collaborators rather than as leader-follower or as mutually suspicious adversaries. The same cannot be said about state-business relationship under the developmental state paradigm.  The model discriminates against the private sector.

Furthermore, the developmental state paradigm’s attempt to equate a state controlled economy with government intervention is misleading.  In all the industrialized societies, governments intervene in the marketplace to improve market outcomes, but governments don’t control or run the economy. The economy is mainly run by the market.  Overlooking this fundamental distinction, the developmental state model states, “These most successful development experiences of Taiwan and South Korea have not been brought about by a night watchman state, restricted to protecting individual and property rights and enforcing contracts. It has been brought about by some of the most interventionist governments to emerge in the context of a market economy.”[xvii]

But what is a market economy? The model talks about intervention in a vacuum.  It does not espouse private property right, profit and price that are the tenets of the market economy.  It fails to understand that in all these countries that it cites, individuals make their own economic decisions in response to prices in a free market as consumers and owners of the factors of production.

Turning to African experiences, the developmental state proposition states, “The paradigm of development that most sub-Saharan countries have followed have failed and failed disastrously. Their economics and politics have entered a dead end.  Such circumstances are precisely the circumstances, which encourage people to look for alternative solutions, alternative paradigms as a means of national renaissance and survival.”[xviii]

Africa is a vast continent with so many different countries; and consequently, one cannot safely make such a sweeping and ambitious generalization about the Continent.  Any serious student of African development can agree that those countries that “have failed and failed disastrously” are the ones that followed a statist model such as Tanzania and Ethiopia, whereas, the market-based economies such as Ivory Coast and Kenya have shown unusually good records.  Furthermore, the fact that the market economy of South Africa today feeds the entire region of southern Africa and attracts much more capital and labor from all over the world than any other African country is strong evidence that Africa should look toward a free market system rather than the so-called developmental state paradigm “as a means of national renaissance and survival.”

Looking back to history, human beings, for countless centuries, dealt with the problem of survival by means of either tradition or command.  The rise of the free market, however, offered a third and successful solution to the problem of economic production and human survival.  Its rule, as best described by Adam Smith is simple:   Each should do what is in his/her best interest.  In a market economy, “the lure of gain, not the pull of tradition or the whip of authority, steered each person to his/her work.  And yet, although each was free to go wherever his/her acquisitiveness directed him/her, the interplay of one person against another resulted in the necessary tasks of society getting done.”[xix]

A market economy does not imply simply the existence of commodity exchange.  The history of exchange is as old as humanity.  A market economy means commercialization of the factors of production. This is a modern idea relative to feudalism or communalism where land is granted by the king or the chief but not sold; where labor does not mean exchange of services but the performance of duty; and where capital exists only in the sense of private wealth rather than creating machinery.[xx]

Under the market economy, farming became more and more a capitalist enterprise as production was undertaken for market rather than self-subsistence. Land began to be used more efficiently; by rotating crops, all the fields could be cultivated, rather than some land lying fallow as had been the practice for several centuries.  Land freed from traditional obligations became just another commodity to be traded. Peasants freed from the obligations of serfdom became wage laborers and entrepreneurs—all farming for market.   Land formerly used by villagers was enclosed for private use. This resulted in more production when large landowners applied the latest and most efficient methods of agriculture. The improvement of methods, crops and livestock gradually extended to the peasantry. Due to these agricultural changes, fewer men and women were needed to produce food and raw materials, leaving greater numbers to work in industry. Major changes in agriculture increased productivity enough to feed a growing population, thereby reducing the threat of famine.  All this was unthinkable prior to the rise of the market economy in the west in the eighteenth century.

  1. The Rationale for and Barriers to Market Transition

            From Nyerere’s Ujamaa to Zenawi’s developmental state paradigm, development thinking in Africa has not changed much.  It is still an anti-market, socialist paradigm.

The socialist model developed first in the west intellectually as an alternative theoretical structure to existing systems and was later tried on a bigger scale but failed to bring about lasting growth and development. The market system, on the other hand, evolved historically.  It achieved economic development for the first time in human history in the eighteenth century and has since assured continuous prosperity.  Economic development, therefore, cannot be based on other than a free market system.

Ethiopia has taken a long time as a semi-famine, subsistence economy.  Agriculture has been the mainstay of Ethiopia for centuries. Grain cultivation began in Ethiopia thousands of years ago. However, agricultural implements and practices have remained virtually unchanged.  Even the oxen-drawn plow, which is at the center of Ethiopia’s agriculture, is not widespread.  Farming is mainly done by hand with the help of machete, hoe and burning. Because of rising population pressure in the rural areas, plot sizes have continuously diminished and become uneconomical to farm.  The average size of a cultivated holding per peasant is less than one hectare.  Livestock rearing is at a relatively early stage, depending entirely on migratory pastoralists, who live in semi-permanent homes, and are not yet prepared to function at other than herding.

In the late 1960s and early 1970s, spontaneous capitalization of agriculture, in response to a rising demand for industrial crops and staples, was growing in much of eastern, southern and western Ethiopia.  In the north, especially radiating out from Addis Ababa and other urban centers, there was a considerable truck farming.  The new farms and the many new factories that opened in Addis Ababa, Asmara and Dire Dawa were mostly owned by Ethiopian entrepreneurs and resident foreigners.[xxi]

Big landowners began to capitalize on the growing market by establishing commercial farms or leasing their land to urban entrepreneurs or transforming cultivators into share- and cash-croppers.[xxii]  At the same time, the government increased its extension programs and began to disseminate, on credit, high-yield varieties, fertilizers, farm implements, draught animals and funds to model farmers and peasant cultivators.  Most of the benefits, however, went mainly to a small number of peasants who owned land and could use that as collateral for loans.

Prior to the military takeover in 1975, fifty five percent of the rural population were tenants, of whom forty six percent were landless and only nine percent owned the land they worked.[xxiii] The government’s attempt to implement a land reform program was repeatedly blocked by the Parliament, which was dominated by the aristocracy and big landowners.  This was more effective because the commercial middle class was small and weak.

The lack of a land reform program became a major obstacle to the spontaneous capitalization of agriculture and the country remained largely a subsistence crop and livestock economy. Commercial farming accounted for a small portion of agricultural production. There were some 200 farmers who had a tractor each, employing totally about 20,000 laborers by 1965.[xxiv]

In 1975, the military government removed some the restrictive elements of the traditional land tenure systems, but abruptly terminated the spontaneous capitalization of agriculture, declaring all land and commercial farms a state property.[xxv]  The government accorded former landless peasants use right, but not private ownership, to their existing holdings.  A farm family was allowed use right to a maximum of ten hectares of land.  The land was not to be sold, mortgaged, or disposed of in any form, but its use right was inheritable.  The government also granted use right to those willing to cultivate land by their own toil and prohibited the hiring of farm labor except by older people, widows, and children, unable to do farm work.

As far as the herding economy was concerned, the government did not alter the free, communal pasture system.  Instead, it simply strengthened the old migratory practice by giving herders possessory right over land they customarily used for grazing.

The much awaited reform to turn land over to the peasantry did not happen.  Use right and collectivization of the rural areas did not improve the status of the peasantry.  Peasants still worked the land they did not own as tenants of the state lacking the pride and security of an owner.

By abolishing private property rights, the government prevented merchants, foreigners, enterprising bureaucrats and urban dwellers from investing in agriculture.  Thus, given a hungry peasantry, the government was the only source of funds for investment.  But the government did not have sufficient revenue due to the poor economy and low levels of taxable incomes.  Land use fees and agricultural income taxes that the state collected from the peasantry was less than 5 percent of the government’s total revenue and these were used mainly to finance the rural bureaucracy.[xxvi]  The government invested less than one percent of GDP in agriculture.  Food production per capita fell to below the pre-reform level and annual food imports increased dramatically.[xxvii]   Finally, by 1984-85, a devastating famine struck most of the country again.

In December 1991, the current government issued its economic policy[xxviii] and decided to control land and essential sectors of the economy as before.  In addition, it adopted a so-called kilil, ethnic-based administration, which is nothing more than a discriminatory ethnic entitlement system.

Kilil impeded free movement of labor and capital and fragmented the national market–reminiscent of 18th century Ethiopia.  Kilil fostered ethnic hatred by dividing the people into natives and settlers, thereby denying the latter equal citizenship and access to land and other resources.

The new government simply carried on with the existing land use right policy, overlaid by a 99-year land lease system, which further strengthened the state monopoly over land.  The government has now the power to withdraw a use right it grants or entirely terminate a lease if it so chooses.

The government believes that all land should remain firmly in the hands of the state because turning land over to the peasants will encourage them to sell their holdings and migrate to urban centers, thereby increasing the number of the unemployed.  This argument, of course, is based on a false assumption that peasants are irrational decision makers.

A recent study about peasant entrepreneurship by Abeje Berhanu and Ezana Amdework debunks the government’s mythology. The study points out that peasant entrepreneurship is a widespread phenomenon among the peasantry, “characterized by strong orientation to improvement and change, creativity and innovation, new ways of generating income and making profit, pro-activeness and willingness to take risk, far-sightedness and forward planning.”[xxix]

Unless land is privatized and spontaneous capitalization of agriculture resumes, Ethiopia will always live under the threat of famine.  Ethiopia still faces bad years periodically, but the worst manifestations of famine have been avoided thanks to food aid from the United States of America and the World Food Program.

The government’s response to the threat of famine is to push for what it calls small farmer development policy rather than agricultural capitalization.  However, small farmers are inefficient and cannot produce the surplus needed for food and industrialization.

For instance, in South Africa, due to a large scale commercial farming, agricultural productivity is sixteen times higher than in Ethiopia.  Because South Africa’s agricultural sector is efficient, it employs only 13 percent of its population in agriculture whereas Ethiopia employs 87 percent.[xxx]  In the United States of America agriculture provided employment for 47 percent of the population in the 1870s.  About one hundred years later, agriculture’s share dropped dramatically to less than 5 percent as a result of increased agricultural productivity and successful industrialization.[xxxi]

It has been reported by the government and international organizations that Ethiopia is one of the fastest growing countries in Africa today.[xxxii] Ethiopia may be growing, but its output base is still very small.  Thus, Ethiopia’s income per capita is the lowest in Africa.  Kenya’s income per capita is two-and-half times larger than Ethiopia’s.[xxxiii]  Despite the much acclaimed growth, real income per capita and standard of living have been declining.  Using 2000 as a base year, real income per capita in 2008-2011 was only thirty percent of the 1987-1990 level (see Table 1 below).

Table 1: Average Nominal and Real GDP Per Capita in Ethiopia, 1987-2011
Year Nominal Income

Per Capita

Real Income

Per Capita (In 2000 $)

1987-1990 252 437
1991-1994 219 295
1995-1998 144 162
1999-2002 121 129
2003-2006 156 128
2008-2011 320 131

SOURCE: Calculated based on information from the IMF, “World Economic Outlook Database,” September 2011.


Ethiopia’s growth has been driven by a rising government spending on infrastructure, but the government expenditure has not stimulated private domestic investment. The growing government expenditure mainly leaks to the outside world rather than stimulate domestic production due to inadequate domestic production capabilities. The government discriminates against the private sector and gives preferential treatment to state- and party-owned enterprises.  Thus, Ethiopia is still predominantly a subsistence economy.

In 1992, the government adopted the program of the International Monetary Fund (IMF) and devalued the birr by 59 percent against the US dollar.[xxxiv]  This was considered a necessary measure by the government and the IMF to make Ethiopia’s economy and prices competitive globally; and consequently to improve the country’s trade deficit.  The value of the birr has since been adjusted downward periodically.  In September 2010, the Ethiopian National Bank devalued the birr by 17 percent, the third time it had done this in just a 14 month period.[xxxv]

However, Ethiopia’s subsistence economy was unable to respond to the challenges and opportunities that were provided by the devaluation program because of its poor, rigid and undeveloped production capabilities. Consequently, there was not any noticeable improvement in domestic production and exports. The trade deficit continued to widen (see Table 2 below).

The devaluation program simply resulted in excessive inflationary pressure by making imports very expensive in terms of domestic currency, thereby further depressing the standard of living of the majority of the population.  In 2009 alone, Ethiopia’s inflation rate was 36.4 percent, the second highest in Africa, after Congo’s 39.2 percent.  Furthermore, using year 2000 prices, the general price index in Ethiopia in 2011 alone was an alarming 317 percent.[xxxvi]

The IMF devaluation program has its own limitations.  It views economic problems mainly from the standpoint of an overvalued currency, which hampers export earnings and debt financing potentials.

When the IMF program began in Africa and Latin America in the 1980s, two-thirds of the countries in the two regions implemented the program.  Thus, between 1980 and 1985, the IMF lent about $4.6 billion to Sub-Saharan Africa. During this period, the African countries cut their imports by about 20 percent. However, the region’s current account deficit did not improve; it was $7 billion for 1980 and 1985, and worse for the intervening years. Many countries continued to experience increasing poverty, declining social conditions and worsening current account deficit.[xxxvii]

The lesson to be learned from all this is clear.  For a devaluation to succeed there has to be a market economy in place with a large number of responsive entrepreneurs, local ownership of industry, sophisticated commercial farmers, a large number of export commodities, a well-developed capital market, a mobile and highly educated labor force and average income substantially above subsistence.[xxxviii]  After a painful experience with the IMF prescriptions, Michael Manley, the late Prime Minister of Jamaica, rightly concluded that the problem in poor countries is not the search for market for sophisticated wheat farmers, already capable of high level of productivity, but how to get a simple peasant to become an efficient producer in the first place.[xxxix]

Table 2:  Imports and Exports of Goods and Services (% of GDP, Average) in Ethiopia
Year X (% of GDP, Average) IM (% of GDP, Average) Av. % Change
1982-1986 7% 12% -5%
1987-1991 6% 11% -5%
1992-1996 7% 14% -7%
1997-2001 12% 22% -10%
2002-2006 14% 32% -18%
2006-2010 12% 31% -19%

SOURCE: Calculated based information from The World Bank, “Development Indicator,” Various Years.


The Ethiopian government has recently embarked on a couple of other programs. One is land registration but the program is not intended to transfer ownership to the peasantry. The other is leasing vast areas of rural land to domestic and foreign entrepreneurs for commercial farming.  The government expects that this will bring capital, skills and infrastructure to the rural areas as well as increase production for domestic consumption and export.  There will be three million hectares of land to be leased out over the next five years at a very attractive price of $10 per hectare per year.[xl] Incidentally, leasing government land to foreign entrepreneurs is not something new in Ethiopia.  It was started by Emperor Menelik in the late nineteenth century and was continued during the reign of Emperor Haile Selassie.

The current land lease policy has opened up the lowland, border areas in Gambela, Ogaden and Beni-Shangul for commercial farming.  However, these regions, although largely uninhabited, are inaccessible and far from potential markets.  The government expects the leaseholders to build and periodically maintain access roads. The leaseholders are also expected to build a new farming community to accommodate farm workers.   All these involve high fixed costs.[xli]

There is a legitimate concern that the land lease program will lead to eviction of peasants since they do not have ownership rights to protect themselves against the government. Such a problem has already occurred in the urban areas, where the government conducts a lucrative land leasing business.  Many urban dwellers in Addis Ababa have been moved by the government to the outskirts of the city.  In Addis Ababa, the government auctions a land lease for outrageous prices ranging between birr 25,000 and birr 40,000 per square meter. No serious student of Ethiopian development will believe that small farmer program and leasing land to foreign entrepreneurs will bring about agricultural transformation in Ethiopia.  Freeing land and the peasantry is primary.

Whereas Ethiopia has yet to free land and its peasantry in order to achieve economic development, human history is replete with examples of societies that have transformed their economies in a fundamental way by uplifting their peasantries first.  For instance, in the 1870s, the Dutch were the first to lead in productivity, with the British and the Americans soon catching up, because many Dutch farmers owned their land, the feudal nobility was small and weak, and the potential power was in the hands of entrepreneurs.  There was greater freedom to produce and sell agricultural products and manufactured goods.  Firms could ship their products to markets and hire workers without political restrictions.[xlii]

In czarist Russia, Alexander II in 1855 marked the beginning of a new push forward in Russia’s modernization. He sponsored the abolition of serfdom, and the emancipation decree of 1861 inaugurated a whole series of major modernizing reform in the 1860s which gave new momentum to the long-stagnant process of Russian modernization.[xliii]

Over one hundred years ago, Japan was aware (as the Ethiopian state today has not been) that improved agriculture lay at the foundation of a strong nation. The Japanese Government understood that this required lifting many of the restrictions on free movement of people and capital.  It required land to be turned over to the peasantry and taxes to be paid at uniform rates on assessed valuation rather than (as had been the case) on the size of the harvest so that the peasant farmers could keep the profits from any increments to production.[xliv]

Even in the United States, where land ownership is not an absolute right, land tenure rules were developed out of the history and culture of the country.  Thus, the Homestead Act of 1862, which created numerous privately owned family-farm units from large landed estates and reserves of unused land, became a strong democratizing measure.  To this was added a host of other basic tools such as credit sources that made land purchase feasible.[xlv]

Despite the overthrow of the aristocracy in Ethiopia in the early 1970s, the peasantry still does not own the land it works and cannot move freely seeking work and investment opportunity.  To the Ethiopian peasantry ownership of land is more than a source of wealth and economic security.  It is a source of political power and social justice.  The peasantry sees in the ownership of land a kind of job security and assurance that whatever happens, it will at least have food and shelter.  Through land ownership the peasantry hopes for status in its communities, the right to act and speak freely, the opportunity to see its children given an education, and the right to share in control over its government.

Property is the foundation for individual rights.  In Ethiopia, the issues of individual freedom, human rights and democracy are all related to the land question.  As long as land remains in the hands of the state, the peasantry cannot be free to prosper and influence government to be responsive to its needs.

  1. The Economic Future of Ethiopia

Ethiopia’s economic future depends on a successful transition to a free market economy.  This is not just an economic adjustment, but it is also an adjustment in a power structure.  It is a process by which the individual frees himself/herself from the controls of tradition and state to own land and other factors of production and make basic economic decisions in response to market forces, thereby creating more wealth and opportunities for upward mobility. Only by allowing the market system rather than the state to play a dominant role in organizing the economy will there be a cohesive and peaceful society of Ethiopia of equal citizens with freedom for development of all.

It is, however, difficult to predict that the nature of the Ethiopian state will change and land will finally be transferred into private hands.  Historically, the Ethiopian state has relied on controlling land and the peasantry for its survival.  But if a pro-market government, based on commerce, education, science and technology emerges in Ethiopia, it can depart from a subsistence production behavior and put the economy on a course to sustainable growth and development.  Such a government can free land, labor and capital and abolish the discriminatory kilik system, thereby leading the way that can provide preindustrial wealth to promote an industrial revolution in Ethiopia.

Ethiopia’s potential surplus for adequate food supply and industrialization lies in earnings from its agricultural sector.  Thus, the first task of the government is to implement a genuine land reform program that can create private ownership of land so that human life will be improved and democratized and social power and wealth will not be limited only to those who possess a military might.

Private ownership of land will give enterprising peasants scope and opportunity for independent experiments. It will enable peasants to own (through an affordable land purchasing system) the land they work and improve their status.  Furthermore, they will have an incentive to work harder, improve their incomes and be able to save and invest in agriculture.

Private ownership of land will compel herders to show interest in scientific stock breeding and range management practices.  The communal range land system has kept the herding communities in Ethiopia in poverty by depriving them of the initiative to be resource-conscious and to devise efficient ways of raising cattle.  Herders in Ethiopia consider natural resources as free and limitless; consequently, they seek to increase their livestock beyond the carrying capacity of their surroundings, pressing harder on the food-feed supply, while adding relatively little to consumable meat supplies or productive work-animal capacity.

Private ownership of land will encourage both domestic and foreign entrepreneurs to invest in agriculture.  For instance, prior to 1974, local merchants and enterprising individuals as well as foreign firms were able to buy or lease land from big landowners to grow industrial crops and food staples.  Most of these commercial farms turned out to be quite successful.  Productivity per acre of commercial farms was five times higher than that of peasant farms.  Commercial farms helped increase the supply of grains and raw materials and enabled the country to be self-sufficient in sugar and cotton production in a short period of time.  They contributed to employment, state revenue and foreign exchange earnings.  The cotton and sugar cane plantations in the Rift Valley promoted agricultural development by distributing high-yield varieties and pesticides, advising small farmers on irrigation agriculture and buying their output.[xlvi]

Private ownership of land has to be enforced by law and the private farms and agri-businesses that were confiscated by the state have to be returned to their former owners or a fair compensation has to be paid.  The land reform program has to also institute private ownership of urban land.  Private homes and plots that were confiscated by the state have to be returned to their original owners or a fair compensation has to be paid.   This will restore faith in the new system and reassure potential investors. The government has to get out of the real estate industry and a free market for urban land and housing has to be restored.  This will help to economize housing and provide potential investors an incentive to increase the supply of housing. Instead of a low-rent accommodation policy, the government can subsidize home purchases by the low income.  This will help promote capital accumulation and widen the middle class.

Only a transition to a market economy can free land and the peasantry and compel persistent technological advances and economic development in Ethiopia. The developmental state paradigm, on the other hand, will delay such a transition and perpetuate a semi-famine subsistence production behavior as it looks backward to an old idea of state controlled economy, which has already been tried and failed.

Twenty-two years have passed since the soviet system collapsed in 1991. Yet, Ethiopia has not transitioned to a market economy and democracy; why not?

When the soviet system collapsed in 1991, Ethiopia was still a Marxist-Leninist state. But unlike in Eastern Europe an alliance of anti-capitalist, powerful secessionist forces emerged in Ethiopia from its Marxist-Leninist state unchecked by a democratic coalition.  As a result, the opportunity to embark on a genuine transition to a market economy and democracy eluded Ethiopia. On the other hand, in Eastern Europe, powerful, market-friendly democratic forces emerged from Marxist-Leninist states, and consequently; they were able to launch a genuine transition to a market economy and democracy.

The current government is not going to willingly relinquish its monopoly over land and embrace a market economy and democracy because this would diminish its power.  But the state monopoly over land cannot continue forever. Thus, a democratic government, dedicated to freedom and equality, will eventually privatize land and transition Ethiopia to a market economy and democracy.

[i] See Marshall I. Goldman, USSR in Crisis: The Failure of an Economic System (New York:  W. W. Norton & Company, 1983) and The Margin, Vol. 3 No. 1 (September, 1987) 6.

[ii] Harry Magdoff, Capital, Technology and Development (New York: Monthly Review, January 1976)

[iii] Julius Nyerere, Ujamaa: The Basis of African Socialism, in Julius Nyerere, Freedom and Unity (Dar es Salaam: Oxford University Press 1967) 162-171.

[iv] Kwame Nkrumah, Consciencism (New York: Monthly Review Press, 1964).

[v] Frantz Fanon, The Wretched of the Earth (New York: Grove Press, Inc., 1963) 99.  Amilcar Cabral also expressed a similar viewpoint.  See Amilcar Cabral, “Revolution in Guinea:  Selected Texts (New York: Monthly Review Press, 1973) 97-98.

[vi] Giovanni Arrighi and John S. Saul, Socialism and Economic Development in Tropical Africa, in Essays on the Political Economy of Africa, in See Marshall I. Goldman, USSR in Crisis: The Failure of an Economic System (New York:  W. W. Norton & Company, 1983) and The Margin, Vol. 3 No. 1 (September, 1987) 6.

[vi] Harry Magdoff, Capital, Technology and Development (New York: Monthly Review, January 1976)

[vi] Julius Nyerere, Ujamaa: The Basis of African Socialism, in Julius Nyerere, Freedom and Unity (Dar es Salaam: Oxford University Press 1967) 162-171.

[vi] Kwame Nkrumah, Consciencism (New York: Monthly Review Press, 1964).

[vi] Frantz Fanon, The Wretched of the Earth (New York: Grove Press, Inc., 1963) 99.  Amilcar Cabral also expressed a similar viewpoint.  See Amilcar Cabral, “Revolution in Guinea:  Selected Texts (New York: Monthly Review Press, 1973) 97-98.

[vi] Giovanni Arrighi and John S. Saul, Socialism Giovanni Arrighi and John S. Saul, ed. (New York: Monthly Review Press, 1973) 12; 33-34.

[vii] Samir Amin, Unequal Development:  An Essay on the Social Formations of Peripheral Capitalism (New York: Monthly Review Press, 1973) 382-385.

[viii] See Robert C. Tucker, The Marxian Revolutionary Idea (New York:  W. W. Norton & Company, Inc., 1970) 95.


[ix] The World Bank, Accelerated Development in Sub-Saharan Africa: An Agenda for Action (Washington, D. C., 1981) 5 and Sub-Saharan Africa from Crisis to sustainable Growth (Washington, D.C. 1989) 136, and Jack Woddis, Africa: The Way ahead (New York: National Publishers, 1964) 97-101.

[x] Meles Zenawi, African Development: Dead Ends and New Beginning, a monograph, N.d.

[xi] Ibid., 4.

[xii] See details in Daniel Teferra, Economic Development and Nation Building in Ethiopia (New York: University Press of America, Inc., 2005) 31-35.

[xiii] Meles Zenawi, African Development, 39.

[xiv] Meles Zenawi, African Development, 11.

[xv] Refer to Dereje Deressa, Ethiopia:  Conditions for a Peaceful, Pluralistic, Democratic Transition, in ERS – Ethiopian Research Service: A Paper of Informed Opinion on Ethiopian Issues, Paper No. 6, May, 1992.

[xvi] Meles Zenawi, African Development, 14.

[xvii] Ibid., 18.

[xviii] Ibid., 39.

[xix] See, Robert Heilbroner, The Worldly Philosophers (New York:  Simon & Schuster, Inc., 1986) 18-21.

[xx] See, Ekelund and Hebert, A History of Economic Theory and Method (New York: MacGraw-Hill Book Co., 1975) 50.

[xxi] Refer to Harold Marcus, Does the Past Have Any Authority in Ethiopia?  Ethiopian Research Service, February 1992, Paper No. 5.

[xxii] Ibid.

[xxiii] Ministry of Land Reform and Administration, quoted in Commercial Bank of Ethiopia, Market Report, January, February, 1974, Appendix IV.

[xxiv] Irving Kaplan et al, Area Handbook of Ethiopia (Washington: U. S. Government Printing Office, 1971) 362.

[xxv] Refer to Public Ownership of Rural Lands Proclamation No. 31, 1975 Negarit Gazeta, 34th year, No. 26, April 1875.

[xxvi] Refer to Central Statistical Office, Addis Ababa, Ethiopian Statistical Abstract 1975 and 1980.

[xxvii] Refer to Central Statistical Office, Addis Ababa, Ethiopian Statistical Abstract 1975, 1977 and 1980.

[xxviii] See Tamrat Layne, Prime Minister, Ethiopia’s Transitional Period Economic Policy Draf in Amhariyna, Nehassie, 1983, August 1991.

[xxix] Abeje Berhanu & Ezana Amdework, Peasant Entrepreneurship and Rural Poverty Reduction: The Case of Model Farmers in Bure Woreda, West Gojjam Zone (Addis Ababa: Forum for Social Studies, 2011) 72.


[xxx] In Daniel Teferra, Economic Development and Nation Building in Ethiopia (Lanham, MD:  University of Press of America, Inc., 2005) 15.

[xxxi] Ibid.

[xxxii] See for instance, World Economic Situation and Prospects (WESP), Capital Ethiopia, January 27, 2011.

[xxxiii] The World Bank, World Development Indicators, 2008 and 2009.

[xxxiv] The International Monetary Fund, IMF Country Report No. 05/26, January 2005.

[xxxv] See William Davison, Ethiopian Bank Says Devaluation to Boost Exports, Domestic Output, Bloomberg, September3, 2010.

[xxxvi] IMF, World Economic Outlook, September 2011.

[xxxvii] See Frances Stewart, Back to Keynesianism Reforming the IMF, in International Economics and International Economic Policy: A Reader, edited by Philip King (New York:  McGraw-Hill Publishing Co., 1990) 337.

[xxxviii] Refer to Wayne Nafziger, The Economics of Developing Countries (New York:  Prentice-Hall, Inc., 1990) 6.

[xxxix] Michael Manley, Jamaica: Struggle in the Periphery (London: Third World Media Limited in association with Writers and Readers Publishing Cooperative Society Ltd. 1982) 164.

[xl] See Ed Butler, BBC, Land grab fears for Ethiopian rural communities, www., November 24, 2010.

[xli] Refer Selashi Kebede, What Does It Take to Encourage Western Investors to come to Ethiopia, A paper presented at African Economic Development Conference, Addis Ababa, June 3-4, 2011.

[xlii] Angus Maddison, Phases of Capitalist Development (New York: Oxford University Press, 1982)

[xliii] Robert C. Tucker, The Marxian Revolutionary Idea (New York: W. W. Norton and Company, Inc., 1969) 113-114.

[xliv] Jan S. Hogendorn, Economic Development (New York:  Harper and Row, Publishers, Inc., 1987) 56-57, and Loehr and Powelson, The Economics of Development and Distribution (New York:  Harcourt Brace Jovanovich, Inc., 1981) 382-383.

[xlv] Raymond Penn, Understanding the Pressures for Land Reform, Land Tenure Center, University of Wisconsin-Madison, 1962, Reprint Series No. 7.

[xlvi] Refer to Daniel Teferra, The Phenomenon of underdevelopment in Ethiopia, Ph. D. dissertation, University of Wisconsin-Madison, 1979, 90-96.