Dehai News

Like in other developing nations, Ethiopia’s experiment with military business led to distorted markets and the stench of corruption. But a unique context meant it also further poisoned the political discourse.

The Metals and Engineering Corporation (MetEC) is in the spotlight again with the arrest of managers for alleged corruption.

More than 27 officials from MetEC face prosecution, including former Director-General, Major General Kinfe Dagnew, after an investigation of the military-linked conglomerate.

But while new revelations about alleged wrongdoing of MetEC have been the talk of the town, military business is a well-known phenomenon, as is associated corruption. Although its genesis can be traced back centuries, the contemporary version is closely tied to state-building in today’s developing and middle-income countries.

Militaries have built commercial empires in Asia, Latin America, Central America, and Africa. In Pakistan, the military runs more than 50 enterprises worth $20 billion, ranging from street-corner petrol pumps to industrial plants. In Indonesia, the armed forces operate a collection of 23 foundations and over 1,000 cooperatives with assets of around $350 million.

Turkey’s Armed Forces Pension Fund (OYAK) comprises 90 companies that are involved in sectors spanning from cars to chocolate with total assets of more than 50 billion Turkish Lira. Similarly, the Egyptian army’s economic empire encompasses a wide-range of companies involved in areas ranging from cleaning services to infrastructure projects.

Military business in Ethiopia, however, is a relatively recent phenomenon. Such is MetEC’s meteoric rise, Transparency International even claimed in a 2015 report it was “the biggest, richest, and the most influential enterprise in the country”.

 The public view appears to be broadly accurate

Established with a registered capital of 10 billion birr, MetEC was officially designed to help Ethiopia achieve middle-income status in 2025 by catalyzing structural transformation to an industrial economy.

The corporation is a consortium of military and civil industries with the overarching mission of helping Ethiopia meet ambitious industrial targets. It was intended to support small and medium enterprises and accelerate technological transfer, thus making a key contribution in the fight against poverty.

The corporation reportedly ran 17 companies with more than 19,000 employees. Its engagement stretched from television production to the construction of multi-billion dollar government projects such as sugar and fertilizer factories, and the electromechanical component of the flagship Grand Ethiopian Renaissance Dam.

MetEC has made some positive contributions to industrialization, but the public perceives it as little more than an institution hemorrhaging and siphoning national resources to line the pockets of an oligarchy. On balance, the public view appears to be broadly accurate.

Issues related to the entanglement of MetEC’s tentacles have been a highly contentious issue. The specific context add a further troubling element, as the public perception is that it was run by officers tied to the Tigrayan Peoples’ Liberation Front (TPLF).

This is primarily because the TPLF formed the core of a revamped military in 1991, meaning that many of today’s senior officers are its former rebel fighters, including its current and former chiefs of staff. TPLF liberation leader Meles Zenawi also led Ethiopia from 1991 to his death in 2012, while party stalwart Abay Tsehaye was head of the Sugar Corporation when MetEC became a major contractor for that state-owned enterprise.

The Tigrayan association was fuel for the government’s opponent and also caused friction within the multi-ethnic ruling coalition, as MetEC was seen as above the law. Given this context, it is tempting to dismiss Ethiopia’s military business experiment as an unmitigated error. But before drawing that conclusion, it is important to consider where it came from, what its purpose was, and to assess its record.

Motivations

The motives for the military’s engagement in a realm outside its traditional mandate vary. They can include economic interests of the top brass, making military expenditure affordable, contributing to development, and a coup-proofing strategy.

Ayesha Sidiqqa, a scholar of military affairs, noted there are not simple linear explanations for what pushes the army into commercial activities. Rather, it is “a complex combination of material, ideological and political factors”. The case of MetEC corroborates this.

The regulation that established MetEC states that its purpose was spearheading industrial-led transformation. This is in line with the statist paradigm that the government followed to try and fast-track development.

Meles subscribed to a variant of the East Asian Developmental State model, where the government sets goals, mobilizes and allocates resources, and picks up the slack when the market fails to deliver in strategic areas. It is against this backdrop that it launched policies aimed at achieving rapid, sustained, and broad-based growth. A major element in this was two successive five-year Growth and Transformation plans (GTP).

Due to high import-dependence, substituting industries were given priority in GTP I that ran from 2010 to 2015. The basic metals and engineering industry was identified as a priority sector not only for import substitution, but also to support exports and develop local design and manufacturing capability.

The strategy that cascaded from the GTP set out the basic metals and engineering industry sectoral targets, such as increasing the share of domestically produced spare parts; increasing per capita consumption of steel; and increasing the sector’s gross production. The government then took measures to meet these targets, one of which was creating MetEC.

Military business was the pathway to both destinations

Aside from these ideologically driven strategy, there were also practical considerations behind its emergence. This can be discerned from Ethiopia’s Foreign Affairs and National Security Policy and Strategy, which includes the striking fact that military business was contemplated as far back as 2002. The reason was the twin needs to build a capable military and minimize defense expenditure. The policy noted: “On one hand, we are committed to placing all our resources at the disposal of economic development. On the other hand, we have to build a strong defense. This will reduce our expenditure for development.”

For the government, military business was the pathway to both destinations. The strategy said: “factories which were originally designed for solely military purposes could also be geared, wholly or partially, to produce commodities needed by the civilian community, contributing to technology transfer between the military and civilian sector. In this manner, the economic and the defense sectors can cross-fertilize each other, helping to reduce the negative impact of military spending on the economy.”

If this reveals the ideological and practical factors behind the advent of military business in Ethiopia, there also seems to have been a political factor: it was a coup-proofing mechanism. A glance at the 2001 TPLF split and subsequent developments shine a light on this.

Meles was accused by comrades of ‘selling his revolutionary soul to imperialism’ and for his soft stance on Eritrea in the run-up to the 1998 war. Subsequently, an acrimonious tussle broke out among the TPLF leadership. In the words of Alex de Waal, a researcher, Meles survived by “the skin of his teeth”.

The assassination of security chief Kinfe Gebre-Medhin, a trusted ally, may have left Meles feeling paranoid towards the security apparatus. He then cleared the way for more autocratic rule by eliminating real or perceived threats. To strengthen his hold, in addition to filling military posts with trusted officers, he seems also to have considered military business to placate the top brass and ensure their loyalty.

Consequences

Studies show the ramifications of military business on politics, the economy, and elsewhere in society.

The first impact is on civil-military relations and democratization. Budgetary control is a key mechanism for civilian control over the armed forces and military entrepreneurship offers increased military autonomy. Pervasive military business can also prove a roadblock to democratization because of its tendency to perpetuate the army’s hegemony over the state and society.

A second impact can be a negative economic effect. If armed forces gain unfair advantages over the private sector—such as tax cuts, easy access to state resources, and favored bids on government projects—this leads to market distortions. According to a 2012 study by Transparency International, commercial activities by militaries cloud economic prospects, as they constrain competition, subduing the private sector and repelling foreign investment.

Commercial engagement can undermine the esprit de corps

The third is the high risk of corruption. There is something of a scholarly consensus about the military’s proclivity for graft when it is involved in commercial activities. Transparency International concludes that “corruption is highly likely to occur either at an institutional or an individual level”. This comes as little surprise given the opacity surrounding military businesses and low or non-existent oversight.

The fourth is a deleterious effect on military professionalism. Commercial engagement can undermine the esprit de corps and institutional cohesiveness. The struggle to get a piece of the cake from lucrative deals unleashes patron-client dynamics and factionalism. In this connection, Kristina Mani, an associate professor of politics at Oberlin College, Ohio, points out that personal and factional gains can trump institutional interest, thereby eroding the professional ethos of the armed forces.

Costs

MetEC has made some positive strides, although its contribution to development has been marred by myriad problems. It is blamed for inefficiency, squandering hundreds of millions of dollars, squeezing private business out of the market, and entrenching the political and economic domination of a TPLF-heavy oligarchy.

There is a body of opinion that believes the military can administer projects more efficiently than public or private companies given its discipline and technical skills. What has transpired in the case of MetEC, however, is the reverse. Its track record of project-execution has dismayed the government and the public. As Addis Fortune put it, “it is becoming a source of national frustration and embarrassment”.

Its performance shows institutional inefficiency and suggests embezzlement. For instance, MetEC was awarded the construction of 10 sugar factories at the cost of $2 billion without having to bid. It was supposed to complete construction within five years. Eight years on, it has failed to deliver a single one.

Yayu fertilizer factory is another MetEC mega contract. It pledged to complete the project within two years in contrast to an earlier study that suggested four. Seven years down the line, the corporation did not complete half the work. The military conglomerate has also been blamed for delaying the construction of the Grand Ethiopian Renaissance Dam.

It is becoming a source of national embarrassment

The recent investigation unveiled by the Attorney General alleges grand corruption by MetEC officials, who were implicated in irregular procurement and investment over six years worth 37 billion Ethiopian birr. A documentary made further damning accusations.

Even without such issues, it would be naïve to think that military business and the private sector could ever compete on a level playing field. Military enterprises are favored to supply their products or chosen for projects, sometimes at a higher price and lower quality, even without having to bid. A good example is the frustration of a senior manager of the Sugar Corporation expressed to a parliamentary committee.

According to the manager, the government awarded MetEC the contract to supply spare parts for factories where not only it often failed to make a timely delivery, but it also charged well above the market price—sometimes as much as three-fold. The manager warned that “the country is paying a heavy price” for its favoritism towards the military-industrial conglomerate.

Politics  

Asymmetric power relations between TPLF and other EPRDF parties enabled TPLF not only to dominate national politics for decades, but also stretch its tentacles deep into the economy. One root of that domination was TPLF control of major security institutions, including the military.

MetEC’s establishment and aggressive expansion is viewed in some quarters as an instrument of advancing these economic ambitions, if not a looting machine to line the pocket of TPLF-affiliated oligarchs. René Lefort, a veteran Ethiopia observer, has also acknowledged TPLF’s outsized economic role.

MetEC has become a bête noire among a swath of society

Siddiqa, in her acclaimed book ‘Military Inc.: Inside Pakistan’s military Economy’, captured the interlink: “Since political power nurtures greater financial benefits, the military fraternity see it as beneficial to perpetuate it. In this respect, economic and political interests are linked in a cyclic process: political power guarantees economic benefits which, in turn, motivate the officer cadre to remain powerful and to play an influential role in governance.”

The problem is therefore beyond perpetuating economic control and is a threat to democratization, as the military may consider that strong democratic institutions would reduce its economic privileges.

In Ethiopia, this has not been without attendant consequences. Other ethnic groups, particularly the Oromo and Amhara, who account for two-thirds of the population, harbored deep resentment. Accordingly, MetEC has become a bête noire among a swath of society, exacerbating state-society cleavages.

Plans

The international experience of military business is mixed. In Central America, once flourishing military enterprises have either shriveled or disappeared. In other countries like Pakistan, Turkey and Egypt, military business has survived, even thrived, while China phased it out in the 1980s.

The evidence suggests MetEC’s commercial activities are doing more harm than good to democratization, state-society relations, and development. The country’s experiment with MetEC has been little short of disastrous and must be discontinued.

Returning the military to their barracks is, nonetheless, a delicate matter. Even small steps to limit its outsized economic clout may provoke the leadership and strain relations with civilian authority. This was evident in Egypt when an attempt to sideline the armed forces from the Suez Canal modernisation soured relations with the Muslim Brotherhood government and contributed to its ouster.

According to James Mulvenon, a specialist on the Chinese military, one of the key factors behind China’s successful divesture was the financial assurance from the civilian leadership of a “sufficiently generous compensation package”. However, compensation in itself may well not convince the military to accept divestiture, as it is unlikely to match the financial gains from businesses.

The experiment with MetEC has been little short of disastrous

Rather the decisive factor may be the power that the civilian leadership can exercise over the armed forces. In Ethiopia, recent event suggest current leaders are strong enough to effectively implement such a policy.

To complement the investigations, the government should pursue step-by-step measures that will lead to MetEC’s gradual death. The recent moves to appoint a civilian technocrat as Director-General, split the corporation into commercial and defense halves, and cancel many of its contracts are steps in the right direction.

As favoritism towards MetEC looks set to end, the opacity that surrounds the institution under the cloak of national security also needs to be curtailed.

It should be subject to the same oversight mechanisms as other public enterprises to improve accountability and transparency. Such measures will not only limit risks, but will also expose it to competition. This will significantly shrink MetEC’s business, and hasten its necessary demise.