America’s Africa: Command- or Market-based?

By IndepthAfrica
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Aug 3rd, 2014
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There is a familiar argument that in the early stages of economic development, African countries do not need democracy. They just need command growth. Democracy will naturally follow. Southeast Asian countries, such as, South Korea are given as examples.

However, command growth cannot lend itself to democracy because the two are incompatible. There is only one democracy, and that is free market democracy. Thus, the real choice facing Africa today is between command growth and market-based-democratic growth. In the former, the economy is mainly organized by a central authority. In the latter, the free market organizes the economy through independent decision-making by individuals.

South Korea’s growth was market-based from the start. In South Korea, the government did not organize the economy. It did not control the factors of production. Nor did it make basic economic decisions. The people themselves made basic economic decisions freely as consumers and owners of the factors of production in response to market forces.

China’s growth, on the other hand, is command growth. The government in China controls land and major sectors of the economy and makes basic economic decisions. The same is true of Ethiopia. However, the failure of the former Soviet Union has shown that command growth cannot be sustained in the long-run.

In comparing South Korea and Ethiopia, for instance, we see that both countries had similar incomes per capita in the early 1960s. Ethiopia’s per capita income then was $76 while South Korea’s was $106. By 2013, South Korea’s per capita income soared to $25,920 while Ethiopia’s per capita income crawled to only $470. How did South Korea do it? This is how.

South Korea undertook the necessary steps to create market-based economy. It privatized land and empowered its peasantry. It used rural manufacturing to narrow the income inequality among its people. It used American assistance intelligently, especially for building infrastructure. Relying on a preferential access to the big U. S. market, it successfully developed export-led economy.

Ethiopia, on the other hand, is still languishing under command growth system. The government controls major sectors of the economy. Land is a government monopoly. The private sector is weak and stifled by an anti-market, selfish government, forcing people to rely on government rather than economy.

Few years ago, the government began to spend on infrastructure, financed through external and domestic borrowing. This has its own limitations. As the debt burden mounts, external sources dry up and the quantity of money balloons, Ethiopia’s command growth will inevitably come to a halt, leaving behind uncontrollable inflation and falling standard of living.

The International Monetary Fund (IMF) has already urged the Ethiopian government to devalue the birr by another 10 percent. In 2010, the currency was already devalued by 17 percent. The devaluation measure, however, did not increase domestic production. There was no significant improvement in exports. Consequently, the trade deficit worsened. As imports became more expensive, prices of essential goods skyrocketed. Such outcomes are expected in a subsistence system, unlike a market economy. A subsistence system does not respond well to devaluation measures because its production capacity is undeveloped and rigid.

Ethiopia’s poverty and unwillingness to transition to market-based growth has consequences for the development and security of the Horn of Africa. Ethiopia cannot lead the neighboring countries with a poor economy.

Ethiopia occupies 59 percent of the surface area of the Horn and 89 percent of the arable land per capita. It accounts for 84 percent of the total population and 87 percent of the labor force. Yet, Ethiopia’s income per capita is the lowest in the region. For instance, tiny Djibouti’s income per capita is six times higher than Ethiopia’s (see Table 1 below).

Table 1: Looking at Horn Countries (2012)

Djibouti Eritrea Ethiopia Somalia & Somaliland

Area (sq.km.) 23,200 117,600 1.1 million 637,660

Population 0.9 million 6.1 million 91.7 million 10.2 million

Pop. Growth rate 1.5% 3.3% 2.9% 2.9%

Labor force 0.3 million 3 million 43.6 million 3 million

Arable land

per capita (hectares) 2,000 690,000 14.6 million 1.1 million

GDP per capita $2,700 $504 $470 $600

Source: Based on The World Bank, The World Fact Book (CIA) & National Atlas of the World.

In contrast to income-poor Ethiopia, prosperous South Africa plays a leading role in the regional economy and stability of Southern Africa. South Africa possesses a well-developed market economy, sophisticated infrastructure and a strong entrepreneurial class. South Africa is a net exporter of food and has trade, transportation and employment links with all the countries in Southern Africa. It has strong trade and investment links with the industrialized world. South Africa accounts for more than 40 percent of Africa’s share of the world trade.

The United States of America has been giving development aid and humanitarian assistance to Africa for decades. The U. S. also offers Africa a preferential access to its large market. Many African countries have been eligible for this benefit through the African Growth & Opportunity Act (AGOA) and the General Systems of Preferences (GSP).

One of the eligibility criteria for the trade and investment benefit is demonstrating progress towards creating a market-based economy. This is necessary, but not sufficient by itself. It is not possible to create market-based economy without private property right.

If the United States wants to see real progress in creating a market-based economy in African countries, it has to push for private property right. It has to push for land privatization, in particular. Otherwise, repressive governments will simply use U. S. assistance to preserve command growth system for their own benefits at the expense of the peoples of Africa.

*Emeritus Professor of Economics at Ferris State University; teferrad@uww.edu, UW-Whitewater.

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