May 7, 2008 — The most significant and daunting problem facing Ethiopia today is the rampant inflation rate. As reported by bloomberg.com, the Ethiopian Statistical Agency has reported that inflation for March 2008 has risen to 29.6%, food price inflation being even higher (39.4%). Some reports indicate the inflation rate in January 2008 to be in the range of 36%. According to Prime Minister Meles Zenawi, the causes of this rampant inflation rate are a growing economy, greedy merchants, and/or farmers who happen to demand higher prices for their products or an increase in demand.
Let us use both economic theory and the facts on the ground to scrutinize the statements made by the Prime Minister. According to many reports, Prime Minister Meles Zenawi has suggested to the Ethiopian parliamentarians that the current rampant inflation rate can in part be associated with the current rise in the Ethiopian economy. By this, he probably meant to suggest that the rising inflation rate is partially caused by an increase in demand- a concept related to the so-called demand-pull inflation1. If that is what he meant, the explanation he tried to give is either mechanical or a result of a misunderstanding of the concept of demand-pull inflation or due to a disingenuous misrepresentation of the facts. His statements could be construed as being mechanical and a lack of an understanding of the concept of demand-pull inflation because he might has been just shifting the demand curve without knowing the factors that shift it. To begin with, a demand-pull inflation is gradual in nature and it is mainly caused by continuous government spending. Government spending might indeed has played a role in the rising Ethiopian inflation rate but, as I will show below, it is not the main cause of this fast and rampant inflation rate. If the Prime Minister is to tell us that the rampant inflation rate is caused by a growing economy and an increased demand, we should observe reductions in the unemployment rate in the country. Unfortunately, not only we do not see any reduction of the unemployment rate, but the unemployment rate must be embarrassingly so high that the government does not even want to tell us what it is! Moreover, if the increased demand is caused by higher demand for the goods and services produced by individual firms, the same firms, faced with such higher prices, must be paying higher wage rates to attract more workers. Of course, what one observes in Ethiopia is not increasing wages, but hungry people running around the major cities trying to make for the day! If firms were indeed paying higher wage rates, the same higher wage rates would have increased the cost of production (decrease supply) thereby offsetting the increase in demand. A rise in the cost of production (decrease in supply) exacerbate the inflation rate and may even play a role for the economy to contract! In any case, the rampant inflation rate- being caused by a rising demand – which necessitates a rise in real wages, is ruled out since the facts on the ground suggests otherwise.
It is also reported that Mr. Zenawi told the Ethiopian parliamentarians that the now "free and independent Ethiopian peasantry", which is asking higher prices for its produce is to blame for the rampant inflation rate that is taking place in the country. If, indeed, the Ethiopian peasants are asking higher prices for their outputs, these same higher prices must induce them to produce more and bring more to the market. The higher outputs should increase supply and reduce the price of agricultural outputs. In short, the increase in demand should be completely offset by the increase in supply; hence, there should not be any significant changes in prices. This, of course, is not the case as far as Ethiopia is concerned.
In fact, this is not the first time that Mr. Zenawi deceptively used the millions of destitute Ethiopian peasants to his political advantage. As Ato Kahsay Berhe in his 2005 book aptly put it, all that Meles Zenawi has done, beginning in the 1970s, is control the socioeconomic life of the peasantry (see pp. 74-76). Not only is Meles Zenwi controlling the life of the peasantry, but his party has also been extorting the peasantry by levying its exorbitant and exploitative fees on fertilizers. By doing so, his party has been acting like leeches, bed bugs, lice, and the mujelie – all of them combined- shamelessly sucking up the bloods of the poor peasants from top to bottom! To add insult to all of these injuries, Mr. Zenawi now tell us that the Ethiopian peasants are now free enough to demand higher prices for their produce! The fact of the matter is that, by not privatizing land, the Meles government is committing despicable crimes against humanity. By not privatizing land, the government is using land to continue terrorizing the peasantry and holding them hostage in their own country. By not privatizing land, the government has denied the peasants from creating capital using their own land as collateral. By not privatizing land, the government has pushed the peasants to be less careful about, the impact of overgrazing, soil and wind erosion that has engulfed the country. The current land tenure system falsely guaranteed land to every peasant. Such false guarantees encourage increased fertility. The fact of the matter is that these ridiculous policies have condemned nearly 85% of the population to be more destitute, forget about them being so rich and free! The fact of the matter is that, as the weekly Addis Fortune magazine on its May 20, 2007 edition aptly put it, farm productivity has declined leading the Ethiopian peasants into increased poverty! Sadly, when some parliamentarians kindly tried to indicate to the Prime Minister that the Ethiopian peasants are faced with increased hardships and even starvation, and not getting really richer than before, he followed it up with the usual deflection and his threats.
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