DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Moderator: Welcome to the Growth Lab podcast.

The Growth Lab at Harvard Kennedy School is a research program that pushes the frontiers of economic growth and development policy research by collaborating with policymakers to design actions and sharing insights through teaching tools and publications.

Today’s episode is part of our South Africa Growth Through Inclusion series which takes a deeper dive into our two-year research engagement in South Africa.

If you’d like to learn more about this work or download the full report, visit our website at growthlab.hks.harvard.edu.

Andres Fortunato: In 1994 South Africa ended apartheid and created a democracy. At the time, the country supported the 47th most complex economy in the world. Far ahead of any other African nation. There were good reasons to believe that the economy would grow rapidly and opportunities would expand to South Africans previously excluded by apartheid. Fast forward to 2023 and South Africa has become less complex when compared to the rest of the world. Jobs are scarce, economic growth is low and highly vulnerable and inequality is the highest globally. Though government policies have dismantled many apartheid institutions, these efforts have not created an inclusive economy for the majority.

In 2021 the Growth Lab at Harvard University started a two year research project in South Africa in collaboration with the National Treasury of South Africa and the Center for Development and Enterprise. This project was focused on understanding the root causes of the country’s economic hurdles and potential pathways towards inclusive growth. My name is Andres Fortunato and I am a research fellow here at the Growth Lab. I was part of the South Africa project and today I have the pleasure of interviewing my boss Ricardo Hausmann, the founder and Director of Harvard’s Growth Lab and the Rafik Hadidi, professor of Practice in international political Economy at Harvard Kennedy School. This is the first episode of a podcast series about South Africa. And in this episode, we will summarize the key takeaways of our research project.

Ricardo, I wanted to start by asking you about your decades long experience in South Africa. Your first project there was in 2004, right? So what were the main economic problems back then?

Ricardo Hausmann: So back in 2004, I was asked to chair an international advisory panel because the government had adopted something that they call the accelerated and shared growth initiative of South Africa that were the acronyms, and they asked us to give them a broad view as as to, you know, what were the issues and, and what they should be focusing on. And I put together a really remarkable group.

We had Dani Rodrik, we had Philip Aguon, Abhijit Banerjee. We had Robert Lawrence, we had Matt Andrews. We have areally interesting group of scholars, Jim Robinson. And we, we looked across the board, obviously, they had very, very high unemployment and we asked ourselves to avoid the unemployment problems.

Where were they coming from? But in general, that, that was a very hopeful period. commodity prices were high, the economy was, was improving in its performance. Unemployment was very high, but coming down. And so it, it looked like, you know, things were going in the right direction and the question is how could they go even in a better direction? And, and we had a, a bunch of ideas that we shared at the time. I remember our final report I presented to Parliament in 2008 in a big act in parliament. It was, it was a super fun experience.

Andres: You started the second Growth Lab project in 2021. What had changed then?

Ricardo: With respect to the first project, that’s a very interesting question because the atmosphere could not have been more different. Actually the macroeconomic paper that we wrote in the first period together with Federico Sarne, who was at the time, a faculty at the, at the Kennedy School and then became the Governor of the Central Bank of Argentina. The macro paper was called macroeconomic Challenges after a decade of success. And in the second involvement, they asked us to write an update on that report. And so we thought, OK, so let’s do, let’s revisit those issues. But we couldn’t use the term macroeconomic challenges after a decade of success because that the previous decade was no success. So, it was really trying to explain why macro performance had been so lousy, why had growth decelerated so much? Why had income per capita been falling? Why unemployment had risen even, you know, significantly more. And so that, that already tells us, you know, that the issues have changed, the hopefulness had gone. And the economy was performing very poorly.

Andres: And in this updated paper, in the second project, what were the main takeaways? And what were your answers to those questions of life?

Ricardo: So when we try to answer the question of why was the economy performing so poorly? I mean, the standard answers that people suggested were, you know, first of all kind of bad luck, you know, commodity prices fell, you know, international financial markets behave more indifferently, et cetera. So, external causes and what we found is that the external causes explain a very, a relatively small fraction of the worsening performance, and you know, South Africa underperformed vis a vis other countries that also suffered the same kinds of shocks. So we thought that yes, you know, sometimes you have the wind in your back, sometimes you have the wind up front. But, but how much does the wind affect you,, might say more about you? And, and so we thought that no, that the causes were fundamentally internal. So we started asking ourselves, well, was there macro mismanagement? Were they just not a adopting the right macro policies? And so we did a deep dive into the macro policies that they had adopted both on the fiscal and on the monetary side. And we found that they were not the culprits and they were, if anything, the victims that a fiscal policy had been hurt by the decelerating growth, And that that, that has eaten, had eaten into, into tax revenues that a growth had been below expectations. So the government also made mistakes because the economy surprised always on the downside. But that you know, people are blaming fiscal policy for being too austere, but that was not the problem because if anything, the, the debt to GDP ratio went from the thirties percent of GDP range to the 70% of GDP range. And and it had not stimulated growth.

We did some fiscal multiplier calculations to show that actually, the multipliers of fiscal policy, that is the impact of fiscal policy on growth instead of being positive was actually negative that the impact of fiscal policy on worsening credit conditions, declining credit ratings, widening country risk had raised the cost of capital to the whole economy and that had had more negative effects than any stimulus demand stimulus on, on the positive side. But more importantly, we realized that something else that the government was underperform in some areas, for example, electricity and that lower electricity had explained about half of the deceleration of growth. And it had also explained in part the the worsening of the fiscal accounts because there had been several bailouts of the electricity company. And there has been more bailout since since we wrote that that paper. So we called it a macroeconomic challenges after the decade of microeconomic turbulence because it was all these micro things that had really damaged the economy.

Andres: Now, we just published yesterday, the final report of the South Africa project we started in 2021. What do you think expands that initial paper? What new answers do we find? What new questions do we find? And what are the root causes in the in South Africa’s economic underperformance that we describe in that final report?

Ricardo: Well, the report says, look, there are here two kinds of issues. One kind of issue is what explains the deterioration vis a vis a 15 years ago. And the other one tries to explain, you know, what are the structural constraints that you know, before in the happy days and now in the Saturdays in both periods, South Africa was under. So to explain the deceleration, we say that the culprit is what we call collapsing state capacity that you have an economy, a fairly sophisticated economy. It depended on having a competent state able to provide the electricity that it had committed to provide.

The rail transport that is important for a mining company, a mining country like South Africa, the passenger rail that was important to bring workers to to their places of work ports that was important to bring stuff out and, and, and, and bring stuff in telecoms security, municipal governments, water, they were all deteriorating at an astonishing rate. And so we documented that this was really hurting the economy. Broadly. The electricity issue was particularly important because all of South Africa’s comparative advantage was built on the availability of cheap reliable coal fired electricity and the electricity company was in a tailspin.

It was they started rationing electricity something that in South Africa they call load shedding, but it’s like planned blackouts and they went from something like two hours a day in 2007 to something like 20 hours a day in, in this, in some, in some periods this last year. So for an economy whose comparative advantage had been based on, on electricity, suddenly having electricity no longer be either cheap or reliable meant a huge shock to, to to the economy. And in a paper that you wrote, you show that manufacturing employment had underperformed particularly dramatically even considering the fact that manufacturing employment has declined worldwide as a share of total employment. But South Africa’s decline of manufacturing employment is orders of magnitude bigger than, than expected. And and that also, even though the whole policy of the government was very much industrial policy focus, they wanted to push manufacturing and so on. But the policy had not delivered on those, on those aspirations. And your paper kind of shows that it is electricity because the industries that were more dependent on electricity performed worse. And that’s kind of like a telltale evidence that electricity played a big role in there. So, but you know, we could say the same thing about all these other areas of government malfunction. So we have to ask ourselves the question, how come a government that knows how to deliver cheap electricity, that knows how to deliver more water in more places suddenly loses that capacity. How, how could state capacity be declining? I mean, there’s no war is is. So what is the process? And, and we thought that some attempts to use the state to do more right at the time when the state’s capability was diminishing. So you have in some sense, this excessive load bearing, where you put more responsibility on the, on the state when the state is losing capability.

So it kind of like implodes and the more responsibility that was put on the state is that the state was told you not only have to deliver all these things that you promise to deliver, but you have now to deliver them in a way that transforms society that gives more opportunities to of affirmative action they would call in the US. And, and these affirmative action policies translated especially in preferential procurement, I think got out of control. There are different ways of preferential procurement in South Africa. And some of them have to do with the rules procurement rules that were imposed in different legal instruments and so on. So I I’m not going to go into the details, but essentially you, you were told the government, OK. Now you, I want you to prove more to do more, but I’m gonna tie your hands in terms of who you can, can buy stuff from. I’m gonna tie a bit of your hands on who you can hire and, and that combination ended up being much, much more costly than people expected it to be.

The second thing is that, you know why the ANC is a single party has been empowered. It’s really many constituencies that have very different views and, and there has been gridlock among, among the the members of the coalition. So a lot of the of, of the problems are, you know, the situation is deteriorating but you cannot agree on a solution. So a case in point is a case of electricity, it was obvious that the electricity sector was malfunctioning w worse and worse. But, but they could not agree on a course of action because some were more status, other were more market oriented and they could not agree and they didn’t need to agree because they didn’t fear necessarily that they were going to lose an election because there’s nothing that disciplines more a political party than the perception that their hold of power is at stake. And that was never sort of like a dominant fear. So it allowed for this difficulty making decisions to, to, to, to endure and to, there was a lot of procrastination because there was not enough political discipline on the process. A third one is ideology. There is a dominant ideology that, that wants to see the state perform certain functions. And when they mean the state perform certain functions, they also mean using the coercive power of a state to prevent others to perform that function. So, well, you might say you know, yeah, electricity has to be produced by the state. But, and you say, well, can you let me produce some electricity? So, no, no, you can’t or so it took, you know, years and years of of load shedding of these these blackouts for them to authorize the private sector to build some generation capacity. And you know, the same problem occurs in rail and in a bunch of other areas. So ideology, I think is at stake and finally, there’s just corruption and capture and so on that, they call it state capture in South Africa that also played a role and in some sense, it was partly enabled by the fact that these preferential procurement rules gave preference to to some kinds of entrepreneurs. They call them interestingly in South Africa tenderpreneurs which are people who, who are specialized in tendering for state procurement only to, to then sell you know, subcontract or, or try to keep as much money and maybe default on, on those on, on those contracts. So it also corrupted the whole, the whole structure. So our perception was that the dynamics of the deterioration had to do with the deteriorating state capacity. And at the core of the deteriorating state capacity is these four interacting dynamics that I’ve just mentioned.

Andres: I also wanted to cover the second big topic that we address in the report, which is spatial inclusion. Could you describe and explain what do we mean by special inclusion? And why is it a problem in South Africa?

Ricardo: Well, a lot of people had looked into South Africa’s labor market and, you know, labor economists are always going to mention things like minimum wage legislation or unions or skills, etcetera. But, and, and we acknowledge all of all of those discussions of South Africa, but we noticed that space played a really, really interesting role that we did not expect it to play. And since we have done a lot of work on Mexico, we had data on Mexico. it occurred to us that, you know, it was cheap for us to compare how South Africa looks with what, how Mexico looks. And in South Africa, in Mexico, in some sense, you can imagine it, it could be a country that’s somewhat similar to South Africa in the sense that it’s a multi ethnic place where there are some communities that speak different languages. You know, South Africa has 11 official languages. I think Mexico has like 100 and 60 different indigenous languages. So there are some municipalities that are indigenous and, and where people speak Spanish as a second language. And, and there are some municipalities that are, are more more you know, Spanish speaking and there’s large differences in income between different, these different municipalities. But what there is is differences in employment rate by LA South African standards, employment rates are incredibly homogeneous in Mexico and incredibly high in South Africa. They are much, much smaller on average and they are much, much more unequal.

So for example, in the rural regions of what they call now, former homelands, it used to be called Bantustans. These areas where Apartheid had tried to concentrate the African population or the black population in those areas in those rural areas, employment rates are ridiculously low are, you know, they’re, they’re in the low 20% rate of the working age population which is about half or less than half of, of the, the national average. So, and in other parts, they look like Mexico. So really, it spans on enormous inequality. And then we try to ask ourselves how come and we found two kinds of spatial issues. One kind of spatial issue is happening inside cities where the logic of apartheid was to put a black people very far away from the central business district where the white people live. So, so they put people very far apart and very far apart in very low density communities in the last 30 years since the end of apartheid housing policies. Have kept a little bit the flavor of the previous policies. They think of themselves as being very generous in giving people significantly large plots of land in, in houses that are fairly decent in terms of size and, and infrastructure, but in godforsaken places and that means that commute distances are very large. But in addition, since these places are super low density where these houses are built, then there is no dense communication between areas. And consequently urban transport solution like metros or bus, bus, rapid transit are not the solution for most people. They, they use these mini buses called taxis. And that makes transport relatively expensive. And in addition, the low densities of these residential areas makes it hard for people to dedicate themselves to the informal economy.

Many say people in Mexico would, would live in the would not go to work very far away, stay around their home and do activities in their home and sell to their neighbors. But since these places are relatively dense, you have many neighbors and there’s a lot of foot traffic, there’s a, a local market. We find that in, in places where these dismally low employment rates, people live too far from each other to have any local market. And so there’s no informal employment. So it’s very hard to get to formal jobs and it’s very unproductive to, to work from home and sell to your neighbors because of the low densities. And those two things explain in our mind why the why cities are so inefficient as places where workers find jobs and firms find workers.

So that was one dimension, that was an urban dimension, but it also had a rural dimension. And we found that in these former homelands, you know, road densities were dramatically lower than elsewhere 30 years after apartheid, in part, because these municipalities that are responsible for responsible for these local roads also have, are very weak and they were given extra powers in the year 2000. But but they were not given, they were not set for success and they have been also imploring their role in in serious financial trouble with very, very poor provision of services. And and so, these places are quite disconnected and they’re disconnected physically but they also disconnected economically. So, those disconnections, I think make South Africa,  so unequal.

Andres: Lastly, I also wanted to ask you, how can South Africa recover a path of sustainable economic growth? And what are the key areas of opportunity for the country to achieve that?

Ricardo: I think you know, we need ideas for, for the recovery of state capacity. We have some ideas on what to do with space. We think that in space there’s a win, win possibility. because we think densification is, is a way to go to have more compact cities that, where people will be able to live closer to where the jobs are. We think that we can get there by empowering people with the right to live closer to their work that goes to, you know, policies that restrict or affect land use. So you know, urban density is regulated to be very minimal. And if you regulate urban density, the poor cannot outcompete the rich for, for land because one way in which the poor cannot compete, the rich is if they build higher. So, you know, they amortize the cost of the land by building more floors on that land. And that allows them to have maybe smaller apartments, better located apartments closer to jobs. And actually, that’s what, what South Africans do when they are allowed to vote with their money or with their feet. But the, but the regulation is pushing in the opposite direction. It’s encouraging urban sprawl very far away places. That means commute, times are very long, commute costs are very high, both direct costs and indirect costs. And and it makes it makes for a very inefficient labor market.

So, so we think that with a new urban strategy, there will have to be a lot of new construction and that new construction is going to generate jobs in the short run, but it’s going to generate more, more efficient and inclusive cities in the medium to long run. So that’s one idea there. But we also looked into something we call green growth and green growth is not just about you know, focusing on what can you do to lower your emissions. It’s really about thinking of the world and the emissions problem of the world and producing things that will lower global emissions. So a world that wants to decarbonize, it’s a world that’s going to need a lot of stuff. So we try to map out what is the stuff that the world is going to need. And from those things that the world is going to need, which ones are closest to South Africa’s capabilities. And that’s one thing that we try to pan out. And we found very interesting growth ideas in the space of, you know, producing things that will allow the rest of the world to decarbonize, you know, there is critical minerals in, in South Africa. They have mastered some, some of these critical minerals are critical for, for the membranes and the catalyst that go into fuel cells that go into electrolyzes that go into batteries. They have they are exploring new technologies of this thing that they call redox flow batteries that are good for grid scale storage of electricity. They’re exploring these ideas using vanadium. They happen to have vanadium, they’re a vanadium producer. And that’s one kind of of green growth opportunities.

A second kind of green growth opportunities is based on the idea that we think that in a, in a decarbonizing world, energy, green energy is going to be very hard to move. So there are going to be very strong market incentives to use the energy where it’s being produced. And and I if you happen to have a lot of sun and a lot of wind as South Africa happens to have, then you could potentially produce very competitive electricity. And that we want that to use that to attract investments away from places that are currently producing a lot of energy intensive things. But importing gray energy like Japan, Korea, Germany and so on those industries, if they are going to decarbonize, they will have to relocate to a green sources of cheap competitive sources of green energy. And I think that’s a, a growth opportunity theme for South Africa. So we end up in a pretty positive note in the sense that we think the last decade, it hasn’t been a good one but the next decade, we could turn the situation around. So I think it’s an optimistic an optimistic message for the country. All right.

Andres: Thank you, Ricardo.

Ricardo: Thank you for the opportunity.

Today’s episode is a recording from our Development Talks – a series of conversations with senior policymakers and academics working in economic development. 

In this episode, Mamo Mihretu, Governor of the National Bank of Ethiopia and former Harvard Kennedy School student, discusses the economic reform programs currently being implemented in Ethiopia, their challenges, what lies ahead, and some lessons learned in policymaking. 

The Growth Lab worked closely with Mr. Mihretu during a three-year policy engagement in Ethiopia, a country that has established a fragile peace after a devastating civil war.

If you’d like to learn more about this work or download the Ethiopia research compendium, visit our site at growthlab.cid.harvard.edu/Ethiopia.

Mamo Mihretu: What I thought I would do is maybe I’ll take 15 minutes, 20 minutes. Talk about the economic reform program that we are implementing currently in Ethiopia and the challenge that we’re facing, and what the future prospects and maybe what I thought would be useful is also talk a little bit about lessons about policymaking. I mean, the technical thing know, I’m sure the theory and everything you learn it here, but you know, in practical terms it did what you know, how the policies formulated and what are the challenges. And I want to just try to share in a few lessons on that as well. But I think a good place to start would be, as Andy mentioned, to talk a little bit about Ethiopia’s economic development gains, because here we are at the public school. You know, let’s talk about development. So I think it’s very good to start by acknowledging the gains that we’ve made over the course of the past two decades, before we talk about the challenges. In the past 25 years, Ethiopia made significant progress in terms of development. Our economy has increased significantly over the past 25 years by almost 15 fold. Now, the Egyptian economy is the third largest economy in sub-Saharan Africa. Next to, I believe, Nigeria and South Africa is the 3rd biggest economy in the African continent. And this is not just growth. This growth was translated into meaningful gains in terms of, for example, human capital, in terms of access to basic services. So it’s not just growth. There is also real impact in terms of other indicators, particularly poverty reduction. So, for example, 25 years ago, poverty rate in Ethiopia was close to 46%. Now that has declined to 20%, less than 20%. So there is meaningful progress in that regard as well. Areas of life expectancy over the course of the past 25 years. Life expectancy has we have achieved across the ten years increase in life expectancy. And again, this is not small achievements and it just grows. It is actually affecting the lives of everyone in Ethiopia. In terms of education outcome. If one looks at increasing literacy rate, there is substantial improvement as well. You know, 20 years ago it was close to t27% and now that has improved to 60%. There are also significant improvements in terms of making and access to electricity reachable to Ethiopians, and it increased from 15% now to almost 50%, five zero. And, you know, 50% of our population now have electricity. And that is because of the significant investment that went into the power sector, into the energy sector in Ethiopia. You know, Ethiopia is currently, as you know, building the largest hydroelectric dam in Africa, the Grand Renaissance Dam, which is an important project. And that would substantially increase access to electricity, electricity to not just to people in Ethiopia, but also beyond Ethiopia, to the neighboring countries. The project is more or less completed. It’s 91% complete. Now, it costs us close to, you know, 5.5 billion USD, and it will be fully completed next year. And when is completely completed, it will generate close to 5000 megawatt energy that would fundamentally transform the energy sector in Ethiopia and in the region. So a significant investment in access to electricity.

Mamo Mihretu: As with the agriculture sector, we’ve made substantial progress. Most agricultural output and productivity has increased, particularly in maize and wheat. This year, you know, more or less we’ve achieved with self-sufficiency part of it because of the crisis in Ukraine. You know, you have to look inward inside and we’ve made substantial effort in terms of mechanization and cluster farming and really inputs supply. And that led to significant improvement in with production. And we are able to travel to achieve self-sufficiency substantially in that regard. So there is substantial development gain over the course of the past ten years. Now, a key question to ask is we know what is the driver of economic growth in Ethiopia over the course of the past two decades? You know, how do we finance our development? I think that’s a very important issue. And in our analysis, for most part, the economic success was made possible through mobilization of financial resources for what you consider to be priority sector and public projects. And internally, for most of the projects that we implemented, particularly public infrastructure projects that we implemented, the source of finance was the largest state-owned bank, the commercial bank of Ethiopia, which by far is the biggest financial institution in the country. So we were able to mobilize resources, saving from the public and channel those resources into priority sector and in the public projects. Second thing is we also borrowed significantly from external sources. So there was significant external borrowing, particularly from Chinese development financial institutions. So there was significant borrowing from Chinese EXIM Bank. Some extent it’s not as big as China’s EXIM Bank, but there is some borrowing from China’s development bank as well. So financing, external financing from Chinese Development Bank. In addition to domestic finances, lead to significant increase in public infrastructure projects in Ethiopia. And that led to, as you know, significant growth. And we were able to sustain that growth for a while. But, of course, you know, this model of financing development at some point reached its limit, and that was reflected in the macro imbalances that we experienced. You know, for example, the projects that we financed through domestic finance and external borrowing largely served the domestic economy and didn’t generate sufficient foreign currency. And because of that, we had faced some difficulty, you know, some liquidity challenge in terms of servicing our external debt. That was one of the problems that we faced. Second thing is in terms of the finances of budgets, we resorted to monetary financing. So the National Bank of Japan was financing part of the budget deficit. That led to inflationary pressure as well. A third thing because much of the credit in the economy was going to priority sectors and also to the public sector. The growth and the investment for the most part was driven by capital accumulation as opposed to, you know, productivity. Particularly the role and the participation of the private sector in the economy was not significant. Which directly affects our job creation agenda. So we have this problem of access to finance, particularly to the private sector. So this was the problem that we faced, although there was a positive story of development, although there was a positive story of that growth translating into meaningful poverty reduction and a meaningful investment in human capital and public infrastructure projects. At some point it reached its limits. So at that time, you know, coincidentally in Ethiopia, there was a change in government. This is very important to note. Not everything is technical, but there was a change in government. And with the new administration, there was opening and pragmatism to look at things afresh and with new attitude of pragmatism and sort of experimental mindset. There was an opening to confront our problems, particularly the problems that I outlined. And that led to some reflection and some diagnosis to really to develop a strategy and economic reform plan that would address some of the macro imbalances that I described. So what we did at that time was that was some time In 2018, April 2018, we started thinking through, you know, what is it that we are facing and what we should be doing? And a team was formed, you know, from experts, from the Prime Minister’s office. At that time. I used to work at the office of the Prime Minister and experts from the Ministry of Finance, the National Bank, jointly. We came up with a strategy of trying to understand today a meaningful diagnosis of our problem. So that process led to the conceptualize of what you called at that time the Homegrown Economic Reform Program. So we developed an economic reform program, sort of medium economic reform program. And the objective of that program was really to address the macro imbalances, including the foreign currency imbalance, the high risk of external debt distress and also vulnerability in the financial sector. Because remember, I was saying that much of the domestic projects in Ethiopia were financed through the Commercial Bank of Ethiopia and eventually the inability of the public commercial companies to pay back their debt led to financial sector vulnerability as well. And the high inflation, and lastly, the limited access of credit to the private sector. So those were the challenge that we identified that we told at that time is that we need to find a solution for. So basically, the Homegrown Economic Reform Program that we developed at that time was aimed at addressing these imbalances and these concerns. So we developed the economic reform program, and essentially the reform program, unlike previous programs in Ethiopia, attempted to be comprehensive. We had developed different elements, different pillars to the reform program. The first element of it is to look at the macro issues, you know, what to call the macro pillar of the reform.

Mamo Mihretu: Second thing is to look at the structural issues and third we want to look at the sectoral issues because we want to really look at sectors that are growth enhancing and we want to do additional work in terms of stimulating the productivity of this sector. So as a macro element to it, you know, structural element to it and also central element to it. On the macro front, our goal was, first of all, we want to step up efforts to improve public sector finance. We also did a number of activities to correct the foreign currency imbalance. And at the National Bank, there was effort to modernize the monetary policy framework, which I would explain a little bit. And also strengthening the financial sector, particularly the biggest bank in the country, the Commercial Bank of Ethiopia. So in regulating the financial sector and effectively towards financial sector, vulnerability was an important part of the reform effort. And finally, we want to develop capital in financial markets broadly. So this where. You know, elements of the reform programs that were clearly outlined that we had a clear strategy for. On the structural reform aspect. Basically, the goal was to try to, first of all, is to let private sector participate in the economy. And we thought we would do that effectively by improving the investment climate in Ethiopia, by addressing regulatory policy, administrative barrier to much robust participation of the private sector in the economy. So there was a broader agenda of improving the investment climate, you know, things like the cutting, the cost of business registration, improving access to credit, you know, generally trying to rationalize and streamline the bureaucracy to support the private sector. Also in Ethiopia, there are two important sectors that would, you know, important play in terms of enabling the private sector. These are the energy sector and the telecom sector. So again, we did we did a lot of work in those two sectors.

Mamo Mihretu: In the telecom for a long time in Ethiopia, there was only one telecom company that was effectively a monopoly in the economy. So we followed the strategy of giving new license to global telecom operators. And also now we are in the process of partially privatizing an incumbent telecom company. The idea would be to support digitization in Ethiopia in that respect were fairly successful. Power sector is an area where there was a lot of investment in Ethiopia. Much of this aid, much of the domestic borrowing and external borrowing goes into constructing new hydro projects. But there was a deal that needed to happen in terms of tariff reform because Ethiopia electricity tariff was cheap. So we want to make the state owned public energy company competitive. So we undertake a tariff reform program which is still continuing. There are also other said sector reform program. So in short. We had a problem that we need to confront. I think we looked at it properly and in response to that, we came up with a different reform program. That was substantially different in terms of its orientation, in terms of its content and in terms of its comprehensiveness. I say that because in terms of in terms of orientation, the goal was to move to what is an economic model that has a healthy balance of private and public participation. In the past it was dominated mainly through public investment. Now we want to increase the participation of the private sector as orientation towards more productivity, towards more active participation of the private sector. By content, I mean we we didn’t really confine ourselves in terms of macro reforms to also try to look at structural and sectoral reforms. And by comprehensive and integration. What I was referring is just not to look at, for example, reform of the vehicle sector. We want to integrate the effects of reform with the fiscal reform, with the monetary policy reform, so everything has to tie together. So that kind of approach is what we followed. But of course, you know, having a great plan, perfect plan is the easiest part of, you know, the reform journey. And I’m sure when you go back, whatever you want to go back after finishing, you’re still here. You’ll immediately see this easy to develop reform program, it’s easy to identify what the concepts and the problems are. But when it comes to implementation, all sorts of things happen. I mean, nearly every time you start implementing a reform program, things go. You know differently. Nothing goes according to plan. So I mean, I remember, you know, the sentiment that it had, the images that we had and the ambition and the hope that we had when we developed and conceptualized the reform program. Once we did that. I would say six months in the implementation of the economic reform program.

Mamo Mihretu: All sorts of things happened in Ethiopia and broadly in the world. I mean, the first thing was the COVID pandemic. The COVID pandemic happened six months after the start of the implementation of the reform program. So things that we didn’t expect came up. So we have to really think of, you know, what are the risks? What are the unknowns? You know, what with would this reform program go wrong? Should be consistently embedded in your thinking. And that’s exactly what happened in our case. So in short you know, after the development of the program, we faced a cocktail of compounding challenges. Something we never expected happen. So like I said, we talked about the COVID pandemic, but some of it are external focus, some are domestic focus. Some are short term by nature. Some are structural. So I would list, for example, you know, the pandemic, the COVID pandemic, and then immediately after that, unfortunate for us in Ethiopia, a very tragic civil conflict and a protracted civil conflict that started immediately after Covid. So that also really, in some respect probably a conflict in, which of course, nobody could really anticipate. And then, of course, the disruption of the global supply chain and transport network. And after COVID globally, you know, China closing down and everything that follows had a significant impact on the Ethiopian economy. Of course, most recently the Russia-Ukraine conflict and its intended impact on the price of fertilizer, on the price of fuel had a significant impact on our economy. And, of course, you know, because we live in the part of the world that’s prone to climate shock. We have recurrent droughts. So this long term challenge of climate shock invariably affected us. So this crisis. It will never go away. So, I mean, surely there is a suspicion that we will address it. But I think now we are used to this kind of crisis. So all of this compounding challenges affected the pace of our reform program. So it has it has caused a heavy toll affecting, number one, domestic economic activity. Clearly, it affected prices, but so inflation become a structural and persistent macro challenge in Ethiopia. It affected our budgetary outlays. It affected monetary development. And finally, of course, it’s also affected balance of payment. And so there was this this this impact that we have to grapple, we have to confront to try to, you know, take the economy on the growth path. So the impact of these reforms inevitably played out, as I say, in the balance of payment, making the structural reforms and improvements of the policy framework even more urgent. But very, very difficult task. There is buzzword, resilience, you know, building the framework for long term growth. Those things are becoming really, really important because the reality is once you start a new reform program, you know how things turn would be completely different. So this crisis upon crisis had had a significant impact on our reform program despite our initial ambition, given the immense scale of the shocks that we faced. We had to adjust and we have to constantly improvise. For example. You know, once we started the reform program, there was a plan to move towards the powers of fiscal consolidation. But the degree of fiscal consolidation has been less than initially planned due to exceptional spending needs as a result of COVID. And that’s in our unique case, is a result of the conflict. So we went exactly opposite direction of what we thought we would achieve.

Mamo Mihretu: So as the reform program. In terms of planned monetary restraint. You know, the goal was to exercise restraint, to have a disciplined monetary stance because we want to address the inflationary pressure. But that was not possible in the context of COVID and because the context of high government domestic financing needs, again, there was shortcoming and the shortfall, in that regard. Of course, balance of payments development deviated sharply from our initial plan, partly because of the conflict, and the conflict lead to a significant deterioration of our external engagement and relationship with international partners. The lack of financing from our international partners, international lenders mean it will have significant impact on our balance of payment return. So I say all that, all of this to say that. This kind of unexpected focus would lead to limited fiscal space. And that inevitably will lead to difficult policy tradeoffs. So do we focus on growth or do you focus on tackling inflation? Or do you focus on achieving financial sector health and stability? I mean, these are difficult issues that have clear trade-offs. And all this happened because of, as I said, unexpected crisis upon crisis that we faced. But having said that, I mean, it’s not just a story of, you know, challenged and that we are not in implementing our reforms at all. We also tried our best, you know, to implement reforms that we initially discussed as part of our economic reform programs. I’m going to list a few of them. First thing is, we try to undertake a difficult subsidy reform. So there was wasteful subsidy in the food sector. There was a wasteful subsidy in the oil sector, wasteful subsidy in wheat sector. We more or less, you know, eliminated subsidies in the sectors. And that has a positive impact in terms of minimizing the fiscal risk. We also followed a tight management of new borrowing, and we avoided completely non-concessional debt because, you know, because we really want to address a debt risk. And after this government came into power, we haven’t borrowed even a single dollar in terms of an non-concessional loan. And as a result of that result of this, our debt-to-GDP ratio has significantly decreased. So no to commercial loan for the past four years, essentially. Also in terms of fiscal policy. We developed a Treasury bill auction market that was successfully launched and that provided for us the space to develop a market-based system of financing the market. Because in the past, whenever there’s a budget deficit, the tendency was to go to the National Bank for monetary financing. So we want to reverse that. And we’ve developed a Treasury bill market to really follow a market-based financing of the budget.

Mamo Mihretu: We also created new institutions. We developed a new Capital Markets Authority, and we are about to launch and establish a stock exchange in Ethiopia, which would we hope will provide long term finance to companies. So we are creating new institutions in that regard. There was we also created a new entity, the Ethiopian Investment Holdings, which Andy mentioned, which basically because remember, like when you are in the policy space, when you think about growth, you always are constantly thinking about how do I finance growth? You know, what is the source of finance for growth? So one thing is to go to multilateral financial institutions, but this is not really a sustainable way of financing growth. So we need to find out, find out and come up with an imaginative solution to finance growth and our solutions. That would be to establish a new entity that would take all the public commercial companies. And instill discipline, corporate discipline. So is that the value can be generated both just from new investment, but also by better managing existing assets that we have. This can completely transform the economy because so much there is so much value that can be created by changing the way we do things. So we created this entity as a sovereign wealth fund, basically taking all the public commercial companies and properly professionalizing the management of the companies so that value can be created from existing projects. Value can be created from existing operation of companies. Finally, we opened up the banking sector to voting participation, which was really a decisive reform in Ethiopian context simply because the sector was closed forever. And this, we hope, will address long-standing weakness in the scope, depth and accessibility of modern financial services. So it’s a sort of challenge, but is a story of resilience because we’ve taken a number of reforms that we hope would help assist in the growth of the economy. Just quickly, because I don’t have time so that’s where we are now. This conflict that I told you about is over. You know, we had a sort of peace agreement. Now we are at a stage where we are trying to resume the reform programs that we’ve started. We are in the phase where we’re trying to address long-term structural reform issues. On the back of a peaceful settlement of an active conflict that we had in Ethiopia. And this a good moment really, to deepen those reforms and in doing transform Ethiopian economy and unlock the potential of the economy.

Mamo Mihretu: So my last point, what are the lessons? I’m not talking about economics, but the lessons, practical lessons. Maybe I’ll try to talk about three important lessons. First thing is, in the context of developed markets. When you think of reform, it’s driving the car. Just think of car as an institution is driving a car using existing levers such as the levers of the machine to optimize across variables. But in the context of a developing country, when you think of reform, it’s not just driving a car. It’s actually like building the car, as you drive on the road, that’s not fully completed, while you are arguing with your spouse about the direction. This is a complicated thing, so it’s not like you are working on an existing system in the process. You have to actually build the institution itself and in this case, the car. And it’s not like there is a shared understanding of what the reform would be. You have to constantly discuss and engage with different parties. So it’s really important to talk about not only the technical part of the reform. I think we need to you need to think about how do you mobilize people around you, how do you engage with other people? So take courses in group dynamics, you know, take leadership that’s very important for MPA/ID students. Second thing is and is the second thing is, you know, policymakers need to know how to sit with ambiguity and uncertainty. You know, not everything will pick up and not everything becomes clear immediately. So I think it’s very we need to have the stomach to observe.

Mamo Mihretu: And just 2 minutes and I’ll finish. So to to really absorb and sit with ambiguity and conflict within the group less internally as with. So I think this is an important skill develop. Not everything becomes clear immediately. So I think living with uncertainty, living with ambiguity would be an important skill to have. Something I would say is, you know, most of the problems that we face in developing countries by nature are complex problems. So do not believe anybody who says they have an easy solution for the problems that we are facing. There is no easy solution that some to take solution calculation. And I think it’s very, very important that we learn how to work in a group and that we realize that, you know, most of these issues can be addressed through collective efforts. And you talk about, you know, before, you know, this sense of us, you know, having a sort of a shared understanding, that’s very, very critical because if people are not, we use very, very difficult to solve this problem and most of these things will not solve immediately. It will take significant amount of time. So we can only solve them through time. So in some ways, you know, in our in my experience, solving developmental challenges is a process. It’s a journey, and it’s also a process of both conservation and the process of change. So that is element of conserving what you’ve have achieved. And there’s also note of change because in our case, for example, we tried to build on the past gains. You know, we didn’t really try to sit everything out. So I mean, there was significant progress that had been in the past, but we tried to, you know, identify in areas where that needs correction and we build on it and we try to change it so that it’s keeping it and plus changing it is an important part of a reform program. And I think it’s very important to keep systems in the sense of us, particularly in the countries that is very, very critical. I mean, we try to, you know, start big massive public projects such as the Grand Renaissance Dam. We started the project like, you know, Green Legacy Project. We are planting close to 5 million trees.

Mamo Mihretu: All these projects, in addition to their economic value will be important in terms of forging that sense of us, that sense of that we are in this together and that we will do this together. So in in some ways, the development process is not just a technical process. The development process is a political process because you have to bring people together with you to be able to make progress. Finally, I think it’s very important to realize and the that crisis will never leave us. You know, we are constantly confronting one crisis after another crisis, and I think we have to be comfortable with living with the crisis. And I think the critical thing is to try to build the foundation for future resilient growth so solving crises will not be possible. And finally, as public servants, as leaders in the public space, we need to have experimental mindset because, you know, when you develop our economic reform program, we never thought that, you know, all this thing will go wrong. But the reality is everything went wrong. So in those cases, I think the most important skill to have is to try to, you know, to learn how to improvise, you know, try to learn how to adapt, to make change here and there so that, you know, your ultimate objective with escrows was poverty reduction. That is just, you know, whatever it is, you can stay on the course. I think experimental mindset you’re trying to do to make decisions, learning from them and really trying to build a resilient system would be an important part of this. And there are more lessons to leave, but I think my last thing would be I that my biggest thing would be development, you know, just not a technical process. It’s a political process. You have to learn how to work with other people. You have to learn how to work people who have differing viewpoint than you. I think that would be an important skill to have. Again, thank you so much.