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Ethiopia-Insight.com: Playing for keeps: The Struggle over political Finance in Ethiopia's Transition

Posted by: Berhane Habtemariam

Date: Wednesday, 22 September 2021

By Guido Lanfranchi, Jos Meester 22 September 2021 ÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷ The transition ongoing in Ethiopia since 2018 has reconfigured the country’s political finance dynamics. The conflict that began in Tigray region and expanded to neighboring regions is a clear example of center-periphery confrontation in Ethiopia, a country that has been experiencing a complex political transition since early 2018. This commentary analyzes one specific dimension of Ethiopia’s center-periphery confrontation: the struggle for control over key sources of political finance; that is, the economic resources used to finance political activity. Among the many potential sources of political finance, the focus here is on two: control over state or party-owned businesses, which politicians can use to allocate favors to selected constituencies, and control over relatively independent regional budgets, which politicians can tap into to finance preferred policies. This analysis focuses on two very different case studies: that of Tigray, a small and peripheral but historically powerful region, and that of Oromia, Ethiopia’s most populous region, and yet arguably a marginalized one. The first part explores the major differences between these two regions in terms of available sources of political finance during the Ethiopian People’s Revolutionary Democratic Front’s (EPRDF) time in power. The second shows how these dynamics have been changing since the start of Ethiopia’s transition in 2018, with a focus on the increasing marginalization of Tigray. •π√> Dealing the cards: The EPRDF’s Ethiopia >From the fall of the Derg regime in 1991 until shortly after Abiy Ahmed’s rise to power in 2018, Ethiopia’s political order was dominated by the EPRDF, a coalition of ethnic parties largely dominated by the Tigray People’s Liberation Front (TPLF). As a result of the TPLF’s dominance, Tigray came to occupy a prominent political and economic position within the federation, gaining control over major potential sources of political finance. For instance, the TPLF’s grip on national politics for nearly three decades enabled the party to wield considerable control over large state-owned enterprises (SOEs). These included both existing SOEs, such as Ethio Telecom and the Commercial Bank of Ethiopia, and those founded by the EPRDF government, most notably the Ethiopian Metals and Engineering Corporation (METEC). This dominance also allowed the TPLF to expand the size and reach of its party-controlled Endowment Fund for the Rehabilitation of Tigray (EFFORT), a conglomerate of businesses established in the wake of civil war in the 1980s to stimulate Tigray’s economy. Because the fund and the party were officially separated, EFFORT could not provide direct finance to the party, the payment of dividends to individuals was prohibited, and board members (generally TPLF leaders) would not receive formal compensation. Moreover, EFFORT’s poor performance in terms of profitability has led some analysts to argue that its main purpose may have been to advance industrial activity in Ethiopia, in accordance with the EPRDF’s Democratic Developmental State system. *************** * Figure 1: Overview of relevant features of Ethiopia’s main regions. Sources: CSA, PEFA. **************** In practice, however, conglomerates such as EFFORT and METEC reportedly provided large amounts of political finance to the TPLF and its regional administration in Tigray. For instance, besides the benefits reaped by individual TPLF members, party leaders could use their control over these companies to allocate favors to allies and selected constituencies in the form of job offers, (sub)contracts, or procurement opportunities. In addition, EFFORT was the largest taxpayer of the TPLF-controlled Tigray regional administration, contributing around 25 percent of its overall revenues. Alongside state/party-controlled businesses, Tigray’s budget proved to be another significant source of political finance in the region during the EPRDF era. Under Ethiopia’s federal arrangement, the regional budget was far from independent, with over half of its revenues consisting of federal subsidies, and more than a third of its expenditures going directly to lower-level administrative authorities to finance service provision. Despite these constraints, however, the TPLF administration secured a relatively strong fiscal position by raising a large share of its revenues in the region, mostly from taxation. Moreover, Tigray’s government managed to retain control over a substantial portion of its expenditure, with the share of expenses dictated by the federal government remaining relatively low. As a result, the fiscal leeway enjoyed by Tigray was larger than that of other Ethiopian regions, making the regional budget a valuable source of political finance. While the EPRDF period saw Tigray become a key hub in Ethiopia’s political and economic system, the situation in Oromia was very different. ************** * Figure 2: Share of revenue from domestic sources. Sources: PEFA; Temesgen Worku. ************** *Figure 3: Per capita expenditure under regions’ political control. Sources: PEFA; Temesgen Worku. ************** Although the TPLF formally shared power with its sister parties within the EPRDF, for decades it sought to keep the main levers of power under its control. As a result, Oromo political forces within the ruling coalition, namely the Oromo Peoples’ Democratic Organization (OPDO), remained marginalized, both politically and economically. Still, OPDO politicians could exercise control over other businesses, such as Oromia’s regional SOEs (which reportedly showed quite positive performances), and the OPDO’s own endowment fund, Tumsa (which featured significant trade and export activities and had stakes in major multi-endowment entities). Yet, what little information is available suggests that these businesses were not able to match their Tigrayan counterparts in number, size, or reach across sectors and regions. This, in turn, meant that fewer independent sources of political finance—be it in terms of jobs, contracts, or procurement opportunities—were available in Oromia as compared to Tigray. Similarly, the political finance available through Oromia’s regional budget was less significant than in Tigray, as the regional administration remained fiscally more dependent on Addis. For instance, the regional government’s share of domestic revenues in Oromia was quite limited (see Figure 2). This situation contrasts starkly with Tigray, both on the revenue side (less reliance on federal subsidies) and on the expenditure side (control over a larger slice of expenditures). For each citizen, the amount of budgeted expenditure under regional control in Oromia has been only half of the equivalent figure in Tigray (see Figure 3). •π√> Shuffling the cards Ethiopia’s transition has thrown into question the patterns of control over a number of key political finance sources. In some regions, the impact has been rather modest. In Oromia, for instance, a flurry of changes—including the OPDO’s incorporation into the Prosperity Party—has not fundamentally impacted existing power dynamics. Oromia’s regional government continues to be firmly under the federal government’s control, only now via the PP. Moreover, the presence of independent political finance sources in Oromia has continued to be limited. For instance, the region’s budget remains heavily dependent on the federal government, and the relevance of state/party-controlled businesses in the region has not visibly increased. As a result, any new regional administration seeking to act more autonomously from Addis would have little independent financial resources to do so. In Tigray, by contrast, the transition has upended the distribution of the region’s political finance sources. Since early in his term, Abiy has sought to limit the TPLF’s control over Ethiopia’s political economy by targeting some of the party’s key streams of political finance. Abiy’s first target, METEC, had its leadership reshuffled, while scores of the conglomerate’s former senior officials were arrested on corruption charges and major state contracts with METEC companies were rescinded. This set the stage for the group’s split and reorganization. The federal government’s moves against TPLF-controlled businesses has intensified during the Tigray war. Tigrayan business owners have been harassed throughout the country. Moreover, the federal government has taken particularly strong measures against EFFORT and its subsidiaries, most notably by freezing their accounts and assets. In addition, the federal government’s decision to demonetize old currency notes has likely wiped out reserves held off the books within the region, thus further eroding independent sources of political finance. Finally, the conflict has also resulted in a drastic reduction of the fiscal leeway enjoyed by Tigray’s government. As tensions escalated after Tigray held a regional election in September 2020 against the Abiy administration’s will, monthly federal subsidies to the TPLF-led regional administration were redirected away from a regional executive considered unlawful. Moreover, the conflict has drastically eroded the region’s domestic revenue base. The damage arising from the war—combined with the freezing of the assets of EFFORT, the region’s largest taxpayer—has made it harder for Tigray’s administration to collect its usual amount of revenues. •π√> A new game Ethiopia’s transition has thus far led to a drastic reconfiguration of political finance dynamics. The most remarkable change has been the increasing marginalization of Tigray, once a key hub in terms of political finance. As the TPLF has fallen out with Abiy, the federal government has sought to cut its adversary’s financing streams. So far, the federal government has been successful in preventing the TPLF from accessing funds via national SOEs or EFFORT, and it has drastically shortened the leash of Tigray’s administration by slashing its budget. The long-term results of this strategy remain to be seen. At the moment, it is not possible to know whether the TPLF has other sources of political finance. Moreover, the federal government itself is in a delicate financial position, thus complicating efforts to assert its authority in the regions. These dynamics open up new scenarios for Ethiopia. While the situation in the country evolves at a fast pace, analysts should pay close attention to the underlying economic dynamics that underpin political confrontation in Ethiopia. Given that a large part of the dispute centers on a struggle to control access to state resources, understanding this game is crucial to explaining future developments. Ethiopia-Insight.com ~~~~~~~~~~~~~~~~~~~~~~~~~ * Main photo: Prime Minister Abiy Ahmed introducing new currency notes; 14 September 2020; Fana. About the author Guido Lanfranchi * Guido is a junior researcher at Clingendael’s Horn of Africa program. His research interests revolve around the interplay between economic, political, and security dynamics in the Horn of Africa and the Middle East. About the author Jos Meester * Jos is a senior researcher at Clingendael’s Horn of Africa program. His work focuses on the functioning of the private sector in conflict-affected environments.

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