Unit seven

Macroeconomic reforms in Ethiopia

 Economic reform began throughout Africa in
the mid-1990s.
 During the mid- 1990s, several civil wars
ended and a wave of democratization
started.
 Ethiopia appears to be one of the poorest
countries in the world. To reverse this
image, a number of economic reforms were
taken by different governments.
7.1 National Development objectives and strategies-
Historical review
 Ethiopia is the oldest independent country in
Africa and one of the oldest countries in the
world.
 The ancient monarchy maintained its freedom
from colonial rule with the exception of a short-
lived Italian occupation effort from 1936–1941.
 In 1974, a military junta, the “Derg”, deposed
emperor Haile Selassie I and established a
socialist state.in 1941, the Italians left behind a
country whose economic structure was much as it
had been for centuries.
 There had been some improvements in communications,
road building, and attempts had been Made to establish a
few small industries.
 During the late 1940s and the 1950s, much of the
economy remained unchanged.
 By the early 1950s, emperor Haile Selassie I had renewed
calls for a transition from a subsistence economy to an
agro-industrial economy.
 Between 1945 and 1957, several technical missions,
including one each from the united states, the FAO of
united nations, and former Yugoslavia, prepared a series
of development plans.
 In 1954/55 the government created the national
economic council which helped to prepare Ethiopia's
three five years dev.t plans.
 The first five-year plan (1957 – 1961)
main objectives were:
 Development of a strong infrastructure,
particularly in transportation, construction, and
communications.
 Establishment of a cadre of skilled and semi-skilled
personnel to work in processing industries.
 Acceleration of agricultural development by
promoting commercial agricultural ventures.
 During the plan period, the gross national product
(GNP) increased at a 3.2% annual rate,
 This development plan promoted improved
production of cash crops, including coffee.
The second five-year plan (1962 –1967)
 The plan continued to prioritize industrial
development.
 Large-scale commercial farms for production of
cotton, coffee and sugar were promoted as a source
of Income, which accounted for about 80% of cereal
production.
The second plan’s objectives were:
 To change Ethiopia's predominantly agricultural
economy to an agro-industry alone.
 Diversification of production, introduction of
modern processing methods, and expansion of the
economy’s Productive capacity to increase the
country’s growth rate.
The third five- year plan (1968–1973)
 The development plan shifted its focus to the development of the
agricultural sector in order to Address the rising problem of food
shortages in Ethiopia.
 It predominantly focused on improving the distribution of
agricultural inputs, such as fertilizers and seeds used By
commercial farmers, and expanding rural health services.
The third plan’s objectives:
 Raising manufacturing and agro-industrial performance.
expansion of educational opportunities.
 Improvement in peasant agriculture.
 Between 1960 and 1970, Ethiopia enjoyed an annual average
growth rate of 4% in per capita GDP.
 The manufacturing sector’s growth rate more than doubled, and
the growth rate for the wholesale, retail trade, Transportation,
and communication sectors increased from 9.3% to 15.6%.
 7.1.2 national development plan under the
socialist period (1974-1991)
 The 1974 revolution by the Derg resulted in the
establishment of a socialist state.
 The Derg changed the previous national development
strategy, placing the emphasis on a centrally planned
Economy.
 Industry-led development was deployed as the main
development strategy.
 Rural land and other productive assets were
nationalized, and
 land was distributed among farmers.
 Commercial farms were put under government
control, and land tenancy was abolished.
Economic planning and development in the post-revolution period
had four distinct phases.
I. 1974-1978: during this period,
 There was little economic growth. The highly unstable political
climate caused economic dislocation in sectors such as agriculture
and Manufacturing.
 The military budget consumed a substantial portion of the nation’s
resources. GDP increased at only an average annual rate of 0.4%.
II.1978-1980: during this period,
 The economy began to recover as the government consolidated
and new Development through cooperation campaign “zemecha.
 Consequently, GDP grew at an average annual rate of 5.7%.
agricultural production increased at an average annual rate of 3.6%,
and manufacturing increased at an Average annual rate of 18.9%.
III. 1980-1985:
 still the economy experienced a setback as
GDP declined, manufacturing took a downturn,
and agriculture reached a crisis stage.
This happened due to four reasons:
a. Widespread drought all over the country,
b. Manufacturing sector stagnated as agricultural
inputs declined,
c. Lack of foreign exchange and declining
investment
d. High rise in defense expenditure.
Iv. 1985-1990:
The gov.t prepared a ten-year perspective plan for the
period 1984-1994, which aimed at
 The Development of agriculture,
 Enhancement of exports, and
 Improvement in the quality of livestock.
As a result:
• The agricultural decline was reversed and the
manufacturing sector also grew.
• GDP increased at an average annual rate of 5%.
• However, the lingering effects of the 1984/85 droughts
undercut these achievements.
• The (EPRDF’s) rise to power in 1991.
 Many of the previous gov.ts’ policies
were reversed, agricultural price
controls were removed, and state Farm
assets were privatized.
 In 1994, the home-born agricultural
(ADLI) was launched as the foundation
For national dev.t, with the main
objective of attaining food self-
sufficiency by increasing
agriculturalProductivity.
The programme entailed three main strategies:
 Expansion of agricultural technologies;
 Investment in agricultural infrastructure,
including inputs; and
 Boosting rural non-agricultural sectors.
a series of investment plans were made under the
ADLI, including rural technical and vocational
education and Training services (TVETs),
 The development of water resources (hydro
power and irrigation),
 Improvements in Microfinance institutions,
improvements in the marketing of agricultural
products, and the restructuring of Smallholder co-
operatives.
 7.1.3 NATIONAL DEVELOPMENT PLAN UNDER FDRE
 The government introduced the
participatory demonstration and training
extension system (PADETES).
 PADETES was used to distribute
 Fertilizers, seed and credit, as well as to
spread information on better Agricultural
practices, to smallholder farmers.
 In addition, the new government adopted an
export oriented development strategy and
implemented structural adjustment programmes
(SAPs).
The ADLI remains the key pillar and guiding Framework
for other successive dev.t plans.
including (SDPRP), (PASDEP), (GTPI).and (GTP II)
The (EPRDF) gov.t initiated the Five-Year
Development Program known as Peace,
Democracy and Development Program which
emphasized the interrelationships b/n peace,
democracy and development.
The major goals and objectives of the programme
were as follows:
 Poverty alleviation through rapid economic
growth.
Ensuring peace and security
People’s participation in the democratic
governance of the country.
Implementation of an efficient educational
system and improvement in the quality of
education.
 Development of a governance system
that ensures social justice.
Implementation of a prevention-oriented
health care system based on cooperation
and participation of the private sector.
Development Programs of EPRDF
 Sustainable Development and Poverty Reduction Programme (SDPRP)
 Plan for Accelerated and Sustained Development to End Poverty (PASDEP)
 Growth and Transformation Plan I (GTP I) (2010/11-2014/15)
 Growth and Transformation Plan II (GTP II) (2015/16-2019/20)

A. Sustainable Development and Poverty Reduction

Programme (SDPRP) 2002/03–2004/05
It was built on the following goals and concepts:
 ADLI
 Food security
 Decentralization and empowerment
 Capacity building in the public and private sector, and
 Reforms in both the justice system and the civil service.
 The first year of the programme was
marked by a drought which led to an
11.6% fall in agricultural productivity,
contributing to a 3.6% fall in GDP.
 It was because of this that the average
growth for the three-year period was
5.5%.
 However, the country experienced 11.3%
and 8.8% growth during the second and
third years, respectively.
 B. Plan for Accelerated and Sustained Development to
End Poverty (PASDEP) 2005/06 and 2009/10
 It was built on the directions pursued under SDPRP and
aimed at private-sector development and at the scaling up
of resources to achieve the MDGs.
The main objective of PASDEP was to lay out the
directions for accelerated, sustained, and people-oriented
development and to pave the groundwork for the
attainment of the MDGs by 2015.
The purpose of achieving this PASDEP objective was to
contribute to the attainment of Ethiopia’s vision of
becoming a middle-income country.
The country’s vision, specifically for the economic
sector, set the following goals:
 To build an economy which has a modern and
productive agricultural sector with enhanced
technology and an industrial sector that plays a
leading role in the economy;
 To sustain economic development and secure
social justice
 To increase per capita income of citizens so that it
reaches at the level of those in middle-income
countries in 2025.
To achieve these objectives, the PASDEP was built
on the following eight strategic goals:
1.Building all-inclusive implementation capacity.
2. A massive push to accelerate economic growth.
3.Creating the balance between economic
development and population growth.
4.Unleashing the potentials of Ethiopia’s women.
5.Strengthening the infrastructural backbone of the
country.
6. Strengthening human resource development.
7. Managing risk and volatility
8.Creating employment opportunities.
Based on these strategic pillars, two alternative
economic growth scenarios were considered.
 In the base case scenario, it was considered
that to achieve the MDGs, an average economic
growth rate of 7% per annum was necessary.
 For the high case scenario, which aimed beyond
achievement of MDGs targets, a 10% annual
average economic growth target was set so as
to lay the foundation for the realization of the
development vision of the country.
 C. Growth and Transformation Plan I (GTP I)
(2010/11-2014/15)
GTPI was the third national development plan
covering the period between 20 10/11 and 20
14/15.
GTPI advanced the Ethiopian national agenda
towards becoming a lower middle-income
economy by 2025.
It introduced new agricultural technologies which
aimed at helping to improve soil productivity, and
It provided Support to small-scale farmers through
training and fertilizer provisions.
The first growth and transformation plan (GTP) was articulated
through the following four overarching objectives.

i. Maintaining at least an average real GDP growth

rate of 11% per annum and attaining the (MDGs)
by 2014/15.
ii. Expanding access and ensuring the qualities of
education and health services and achieving MDGs
in the social sectors.
iii. Establishing conditions for sustainable nation
building through the creation of stable democratic
and developmental state.
iv. Ensuring the sustainability of growth through
maintaining macroeconomic stability.
D. GROWTH AND TRANSFORMATION PLAN II (GTP
II) (2015/16-2019/20)
The overarching objective of GTP II is to sustain the
accelerated growth and establish a springboard for
Economic structural transformation there by realizing
the national vision of becoming a lower middle-income
country by 2025.
 To this end, GTP II has set out the following specific objectives:
i. Achieve an annual average real GDP growth rate of 11% within a
stable macroeconomic environment and thereby contribute towards
the realization of Ethiopia’s vision of becoming a lower middle
income country by 2025, while pursuing comprehensive measures
towards narrowing the saving-investment gap and bridging the
widening trade deficit.
ii. Develop the domestic engineering and fabrication capacity and
improve productivity, quality, and competitiveness of the domestic
productive sectors (agriculture and manufacturing industries) to speed
up structural transformation.
iii. Further solidify the on-going public mobilization and organized
participation to ensure the public become both owners and
beneficiaries from development outcomes.
iv. Deepen the hegemony of developmental political economy by
strengthening a stable democratic developmental state.
PILLAR STRATEGIES
The pillar strategies of GTPII are built on that of
GTPI complemented by additional pillar strategies
that serve as Foundation for sectorial plans.
Therefore, in order to achieve the objectives of
GTP II set out above, the following pillar strategies
were pursued:
I. Sustain the rapid, broad based and equitable
economic growth and development.
II. Increase the productive capacity and efficiency to
reach the economy’s production possibility frontier.
III. Speed up and catalyze transformation of the domestic
private sector and render them a capable Development
force.
IV. Build the capacity of the domestic construction
industry, bridge critical infrastructure gaps with
particular focus on ensuring the quality of infrastructure
services sector.
V. Properly manage and administer the on-going rapid
urbanization to unlock its potential for sustaining
Growth and structural transformation of the economy.
VI. Accelerate human development and technological
capacity building and ensure its sustainability.
VII. Establish democratic and developmental good
governance.
 GTP I AND II PERFORMANCES AND THEIR MAJOR CHALLENGES
 During the implementation of the two growth and transformation plans (GTP I
and II),
Ethiopia has registered rapid and high economic growth.
 GDP grew on average by 9.2% per year and the volume of real GDP ROSE from birr
828 billion in the 2009/10 fiscal year to birr 1.99 trillion in2019/20 fiscal year.
 compared to an average of 11% annual growth target during the period, the actual
growth performance was 9.2%.
 Major economic sectors, agriculture, industry and services respectively
registered an average annual growth rate of 5.3%, 17.2% an 9.7%.
 The agricultural sector, contributed 24% and the service sector has contributed
40.8% to the GDP growth.
 The economy registered an average growth of 9.2% per year from 2009/10
to
2019/20 years, and nominal GDP increased from birr 395.9 billion in 2009/10 to birr
3.37 trillion in 2019/20.
 Total investment, exports and imports of goods and services, on average, were
35.1%, 10.1% and 25.9% of GDP, RESPECTIVELY.
 The share of gross domestic investment (as% of gdp) increased from 31.1%
in
2009/10 to 38.4% in 2015/16.
Because of the prevailing political instability during
much of 2016/17, domestic and foreign direct
investment Slowed down, in 2019/20, however,
due largely to the covid-19 pandemic, the
share of total investment declined to 30.8%.
The rate of gross domestic savings rose from 17.3%
of GDP in 2009/10 to 20.9% of GDP in 2019/20.
The poverty headcount ratio at the national
poverty lines reduced from 29.6% in 2009/10 to
23.5% in 2014/15.
Gini coefficient has increased from 0.30 in 2009/10
to 0.33 in 2014/15.
The unemployment rate increased from 18% in
 The major Challenges are identified below:
Failure to ensure quality economic growth:
• although high economic was registered, there were gaps
in terms of creating adequate job opportunities, ensuring
equitable distributions, ensuring structural
transformations, and creating sectorial linkages and
synergies.
External debt distress:
• Besides the lack of or limited competitiveness in
international markets, our domestic products were also
not able to compete with imported commodities.The bulk
of Ethiopia's export commodities come from a limited
number of agricultural Products without significant value
additions.
IMBALANCE BETWEEN DOMESTIC SAVINGS AND INVESTMENT:
• Ethiopia experienced a high rate of growth in
investment Between 2010 and 2020.
• Domestic savings were unable to satisfy the
domestic investment demand, causing large
investment savings imbalance. to realize the
objective of boosting domestic saving, a host of
reform measures were undertaken during the
Gtp-i and GTPII period in Ethiopia.
the share of gross domestic investment in GDP
increased from 22.3% in 2009/10 to 34.1% by
2017/18. this made a significant contribution to the
rapid economic growth registered during
the planning period.
CHALLENGES TO STABILIZE INFLATION:
High and persistent inflation is evidently highly
associated with macroeconomic instability.
Historically, the Ethiopian economy was known for
its low inflation.
Prior to 2003/04, the country had not suffered from
high inflation.
Ethiopia has experienced the highest inflation and
higher inflation rate of 55.2% was recorded during
2008.
The highest prices were for food, housing, fuel
and transport services, making theUrban poor the
most vulnerable to the effects of inflation.
RISE IN UNEMPLOYMENT:
The high economic growth registered
over the past 10 years(between 2010
and 2020 ) was unable to create
sufficient job opportunities, and failed
to bring the desired increase in the
standard of living for most citizens.
SLUGGISH STRUCTURAL TRANSFORMATION AND WEAK
SECTORAL LINKAGES:
between 2010 and 2020, the process of Transition
from a low productivity agricultural sector to
sectors with high productivity was very weak.
Ethiopia's export has always been dominated by a
small number of agricultural products and has
failed to Transit to exports led by manufacturing
products in order to secure sustainable and reliable
export earnings.
 POOR CAPACITY TO MOBILIZE DOMESTIC RESOURCES:
 Although Ethiopia's capacity to collect taxes
improved, the tax to GDP ratio dwindled.
 The government’s commitment to improve the overall
public resource management and its efforts to
Minimize misallocations of public expenditure minimal.
LIMITED ACCESSIBILITY OF FINANCIAL INSTITUTIONS:
Between 2010 and 2020, state-owned commercial.
and Development banks channeled a significant amount of
long-term loans to state- owned development Enterprises.
although the financial infrastructure shown growth, it was
not commensurate with the level of growth of the Economy
and its accessibility was low.
DEFICIENT AND LOW QUALITY PROVISIONS OF SOCIAL SERVICES AND BASIC
INFRASTRUCTURE:

between 2010 and 2020. although particular

attention was paid to the expansion of roads,
railways, energy, irrigation and various
Infrastructure development activities, there
were still significant deficiencies in the supply.
there was also a wide gap in terms of quality
infrastructure provisions.
there were also deficiencies in social service
provisions, particularly in health and
education.
the ten-year development plan lays a long-term
vision of making Ethiopia an “African
beacon of prosperity”.
ensuring high per capita income through rapid
economic growth is one of the sources of
prosperity.
prosperity is largely defined in terms of
happiness, improvement in standard of
living and quality of life, and the Level of complete
satisfaction.
Development outcomes can be expressed as follows:
I. Improvement in income levels and wealth
accumulations so that every citizen will be able to
satisfy their Basic needs and aspirations.
II. Basic economic and social services such as food,
clean water, shelter, health, education, and other
basic Services should be accessible to every citizen.
III. Creating an enabling and just environment where
citizens will be able to utilize their potentials and
Resources so that they can lead a decent quality life.
IV. Improvement in social dignity, equality, and freedom
where citizens can freely participate in every social,
Economic, and political affairs of their country.
 7.1.4 NATIONAL DEVELOPMENT PLAN AFTER A REFORM
(2021-2030)
Objectives of the development plan
To achieve the national long-term plan of making Ethiopia an African
beacon of prosperity, the following major development objectives are:
 Building a prosperous country by creating a pragmatic market-based
economic system.
 Maintaining macroeconomic stability, ensuring rapid and sustainable
economic growth, and creating decent jobs.
 Ensuring structural economic transformation by promoting overall
productivity, and competitiveness.
 Creating an enabling environment where every citizen will become
the owners and beneficiaries of the development.
 Ensuring a competent, independent, and quality civil service system.
 Building strong and inclusive institutions that will ensure peaceful
society, access to justice and upholding the rule of law and human
rights.
Strategic pillars and key priority areas
 The overall development goal is to achieve
improved welfare of the society by improving the
standard of living And quality of life.
The key strategic pillars of the ten- year
development plan are:
1.Quality economic growth and shared prosperity
2.Economic productivity and competitiveness,
3.Technological capability and digital economy
4.Sustainable development financing
5.Private sector-led economic growth
6.Resilient green economy
7. Institutional transformation
8. Gender and social inclusion
9. Access to justice and efficient civil services
10. Regional peace building and economic integration
The priorities are set for the medium-term to
provide substantial milestones for long - term
development plan.
These key priority areas are:
I. Multi-sectoral and diversified sources of growth
and job opportunities
II. Sustainable and inclusive financial sector
development
III. Harnessing the demographic dividend
IV. Quality and efficient infrastructure development
V. Sustainable urban development
VI. Peace, justice, and inclusive institutions
 7.2 Overview of home-grown economic
reforms in Ethiopia
 The rapid and sustained economic growth that Ethiopia registered between
2010 and 2020 mainly driven by aggregate demand.
 Despite its rapid growth, the economy failed to raise productivity and create
Adequate job opportunities.
 The home-grown economic reform (HGER) with the central objectives of
sustaining rapid growth, maintaining stable macroeconomic environment by
reducing debt vulnerabilities and creating adequate.
 The economic reforms are being translated into action through policy that
enhances
The supply side of the economy.
 The main aim and focus of the HGER is the enhancement of productivity and
competitiveness of the overall economy, and a gradual transition from public
to private sector-led growth.
 The HGER plan is classified into macroeconomic reforms, sectorial reforms,
and Structural reforms.
 7.2.1 macroeconomic reforms
In order to eliminate macroeconomic imbalances
and create a stable macro economy, strict
macroeconomic management has been put in place.
The following key focus areas have been identified in
the macroeconomic reform Plan.
 Ensuring fast, sustainable and broad-based
economic growth. Reform efforts have been
underway across various sectors of the economy
to ensure high economic growth.
 The efforts are being implemented in the way
that involves several actors in the Economy
including the private sector and development
partners.
 Evaluation of past development plans has been
thoroughly done in order to learn from past
strengths and rectify the weaknesses through the
experiences gained from the challenges so as to
design and implement Inclusive development
plans in the future.
 New operational mechanisms are taking effect to
modernize and enhance tax collection capacity
as well as citizens’ awareness about tax paying
duties and responsibilities.
 The operational dimensions of the fiscal reform
process mainly focused on making the overall
tax administration fair, transparent and
accountable.
 Strict justice sector reforms and operations have
targeted the informal sector and contraband, which
has a detrimental impact on domestic income, and
the business community.
 These measures have already started showing
encouraging results. Budget administration and
auditing system have given due attention.
 Strict auditing and monitoring is necessary in order
to ensure that the allocated budget is utilized for
the intended social and economic purposes.
 Proper administrations and systems have also been
designed to facilitate support, monitoring and
accountability.
Sectoral reforms
The country will follow a multi-sectoral growth
approach by diversifying sources of economic growth
and job creation and undertaking necessary and
substantive policy reforms across the different
sectors.
In this context, particular attention has been
given to the following sectors as
sources of growth.
Agriculture: in the past, the agricultural sector has received
particular attention. during the HGER process, there have
been significant political commitments to improve research
and Development in agriculture and to improve all-rounded
support given to all actors in the agricultural sector.
The HGER agricultural sector reform aims to improve the role
and participation of the private sector, Expanding of small- to
large scale irrigation development, improving supply of
inputs and finance, Enhancing the productivity of livestock,
etc
Mining: existing mining policies and legal frameworks have
been under the reform process so as to create a Conducive
investment climate and attract a large number of foreign and
domestic investors into the subsector.
in Ethiopia the role of the government in terms of
infrastructure development and other targeted
support in The subsector is vital for boosting
private sectors’ confidence and trust.
Tourism: although Ethiopia is endowed with
abundant tourism destinations, the subsector has
not fully utilized The available opportunity.
as the subsector has a characterized with high
potential for domestic and foreign revenue
generation, and Job creating opportunities, the
tourism reform has paid particular attention to
improving and expanding Tourism destinations.
Structural reforms
It is, very important that the government plays a
role in the economy, and in particular, through
public investments and lead the overall economy
to a desired direction based on market principles.
Any public development projects, could possibly
be handed over to private investors Through fair
and transparent approach.
The ultimate goal of government intervention is to
create strong private initiatives or investment in
the economy.
the government should support all development
forces including private investors.
the government is determined to put the
necessary policies and administrative structures in
place to assist the Private sector development in
priority sectors such as agriculture, manufacturing,
mining, tourism and ict,
Other focus areas of structural reform processes
include:
 ensuring coordinated transport and logistics
services:
 implementing import substituting development
strategy:
 Reforming the investment and job creation
landscape
 Increasing the role and participation of the
private sector in the economy:
 Expediting the privatization of large state-owned
enterprises and liberalization of priority sectors:
 Strengthening Ethiopia's global and regional
partnership promoting free movement of labor:
 Promoting the development of civic societies:
diversifying Ethiopia's development partnerships
and the sources of development finances:
FISCAL DECENTRALIZATION
Generally refers to the devolution of taxing and
spending Powers from the control of central
government authorities to government authorities
at sub-national levels.
Nowadays in the world many governments including
that of ethiopia are structured In to federal systems.
The extent of centralization can be measured by
centralization ration which is direct government
expenditure by central government divided total
government expenditure.
 In Ethiopia, the federal government
makes fiscal equalization payments to
local governments with the stated Goal
of equalizing the fiscal capacity of
local governments to provide services.
 Fiscal equalization aims at reducing or
eliminating differences in net fiscal
benefits which is the difference Between
the utility.
 It is a companion of fiscal decentralization
which ensures economic governance such
as equity, efficiency and Stability of fiscal
policy.
 In the past ten years 2010 to 2020,
additional budgetary support has been
provided for regional governments.
 for instance, in 2017/18, birr 7 billion has
be allocated to regional states as per the
grant formula for the Implementation of
the sustainable development goals (SDGS).
 FISCAL DECENTRALIZATION
 Most economists agree that spending and
taxing decision intended to stabilizes should
be made by central government.
 Local/ state government too small to affect
overall economic activity.
 There are both opponents and proponents.
Disadvantages of decentralized system
Interstate/local externalities: there are costs and
benefits of local government goods and services to
residents Who live in other political jurisdictions.
 think of localities /state as a firm producing local
public goods such as like education, sewage.
 loss of scale economics in provision public goods:
for certain public services the cost per person may
fall as The number of user’s increases.thus
consolidation is one way to for communities to
take advantage of scale economies.
INEFFICIENT TAX SYSTEM: efficient tax requires
higher a tax rate on inelastic demanded or supplied
goods and vice Versa.
goods which are inelastic at national level may be
elastic at local level.
 7.1.3 disadvantages and advantages of
decentralized system
Loss of scale of economies in tax collection: individual
communities may not be able take advantage of scale
Economies in the collection of taxes.
each community has ton devote resources to tax
administration, made by having a joint taxing authority.
ineffectiveness of redistributing program: (equity
measures) suppose the tax and expenditure pattern in a
Particular community is favorable to the poor.
it transfers income to the poor. This attracts more poor to
this region and expels the rich out of this region.
finally. The region left with small tax base which leads to
abandonment of the program.
Advantages of decentralized system
Decentralization renders a number of benefits.
They include tailoring output to local
taste/local specific, fostering
intergovernmental competition, and
experimentation and innovation in locally
provided public goods and services.
Tailoring output to local tastes/local specific:
a centralized government tends to provide the
same level of public services throughout the
country regardless of the fact that peoples
tastes differ.
Individuals with similar tastes for public goods group
together, so communities provide the type.
Fostering intergovernmental competition it is
believed that government managers lack incentives
to produce at minimum possible cost.
Private firm managers will be out of business of they
fail to minimize cost. But public managers can
continue.
But if citizens can change among communities/states,
it creates incentive for governments’
managers/administrators to produce efficiently and
to be more responsive to citizens.
Experimentation and innovation in locally provided
For many policy questions no one is certain what the
right answer is, or even whether there is a single
solution that is the best in all situations.
One way to find out is to let each community choose
its own way and then compare the results.
The case in Ethiopia is different. One policy used
across all parts of the region in the country.
Therefore, purely decentralized or centralized system
cannot be expected to maximize social welfare.
There is some optimal level of federalism