Interview with World Bank head Ishac Diwan

Despite fears of a gloomy future, the head of the World Bank in Ethiopia, Ishac Diwan, remains optimistic. But, he tells IRIN, if the country is to begin to compete in the global market and achieve sustainability it must overcome the barriers posed by its geographical isolation. QUESTION: Does the World Bank feel any responsibility over the lack of development in Ethiopia in 20 years? ANSWER: I don't think the World Bank feels responsibility in terms of guilt, but it certainly feels responsibility in the sense that Ethiopia is at the heart of the mandate for poverty reduction of the World Bank. If we cannot help Ethiopia make progress then I have doubts over our future. So from that perspective we feel enormous amounts of responsibility. Do we think we made major mistakes in the past? I don't think so, but certainly some minor ones. Q: Is the government's poverty reduction strategy paper (PRSP) ambitious enough? A: I think for a first PRSP it is very ambitious. By world standards it is a PRSP of a very poor country; the government is moving from spending US $1.50 [per person] to spending US $1.80 on health in three years. I think the outer limit of what is feasible in Ethiopia is probably to double international support in the next three years. Q: Is Ethiopia's current debt sustainable? A: Ethiopia already benefits from the Highly Indebted Poor Countries Initiative (HIPC). But by standard measurements, its debt ratios have moved up since then, and its debt is not sustainable. It is however important to realise that this unsustainability is not connected with the real variables under Ethiopia's control, such as exports, or new borrowings. These variables have been evolving pretty much as expected. So Ethiopia's ability to service its debt is not affected. Rather, the unsustainability issue is connected with variables outside Ethiopia's control, in particular the world interest rate which has come down dramatically and which is used to "compute" the present value of its debt. There is here a puzzle that the international community and Ethiopia need to resolve in the coming months, by either providing Ethiopia with additional debt reduction, so it exits from HIPC with a sustainable debt, or by changing the rules that are used to measure debt sustainability. Either way, what is important is to maintain the ability of the international community to transfer resources to Ethiopia in the future so that it can meet the Millennium Development Goal obligations. Q: Where do you think Ethiopia can gain in terms of trade and taking advantage of a global market? A: The average cost of international transport [to Ethiopia] is around 30 percent. It is three percent in China. This is what you get when you add all the costs associated with the transport of imports and exports, such as costs of trucking and boat and air transport, and insurance and look at this total as a share of total imports and total exports. This shows that Ethiopia is truly an isolated country. The national cost of transport is also very high. Q: So the key would be to reduce transport costs? A: Yes in the long term development objective is to reduce transport costs in order to make it possible for the country to grow in a sustainable manner. This country is taxed enormously by its geography and you need a lot of international support to reduce those transaction costs so a normal economy can function. Q: What are the implications of high transport costs? A: Labour intensive manufacturing like the retail business is hampered. You bring inputs from abroad and add some labour to it and re-export it. Now to do that here it is going to cost you more. It cannot work even if you are very competitive; even if your wage is many times less than India or China, you have lost this advantage in transport cost. So labour intensive manufacturing with just labour as value added is not going to work here. Q: What will work? A: I think the government is focusing on exactly the right non-traditional products. For example, exporting roses makes sense because they are light, can be transported by plane, and correspond to an area of comparative advantage. Other products are not so obvious and that is why you don't find much manufacturing in exports. In Ethiopia all you find is coffee, chat, hides and skins - all are domestically produced. Tourism has potential, but it needs a lot of investment. Information, Communications and Technology (ICT) services is another area - again its needs a lot of investment and better education. Then there are other products that would make sense: garments using local cotton and leather products, using local skins and hides. Q: Is the government’s agricultural development led industrialisation (ADLI) working sufficiently well? A: Yes and no. Most people are in agriculture and agriculture needs to grow and become more productive to make a difference. This is a truism. But the government has focused on success in agricultural exports leading to demand for locally produced industrial goods. I am less convinced about that. I think it should be more, say, cotton feeding into manufacturing exports. Exporting agricultural goods is OK for some things, but the gains are limited, and the terms of trade fluctuate a lot. Plus for most of the crops, such as cereals, transport costs are just too high - the cost of transporting the cereals to Djibouti is equal to the international price of cereals. What you want to do is add value to agricultural goods. I think that is also the way the government is interpreting ADLI now. Q: Can areas like cotton and leather create sufficient demand for jobs? A: Exports should not be seen as the main source of demand. The importance of exports is to create foreign exchange which is needed to import machines, technologies. The main source of demand must be internal and will be food. This is a country where 70 percent of household budgets are spent on food. Q: To an outsider that might not sound convincing given the massive food aid required by the country? A: This year is warping the way we think about things. Every year is not like that. I am much more afraid of repeating the experience of the previous year, where we had very good crops and food prices collapsed. The structural question that needs to be resolved is how to keep food prices from collapsing as agricultural productivity rises. And the answer is what the government is now advocating: let the farmer produce for the market, diversifying into more products, and specialising to increase efficiency according to the climatic zone. On the other hand, and that's the part of ADLI that is not working so well, workers need to also move out of agriculture at the speed at which agriculture becomes more productive. This is where I value the decentralisation move - as urban development in 500 small towns, as engines of growth where people can move and invest in agro-industries and services. Q: But the rural resettlement policy seems at odds with that? A: In 2050 there will be 150 million Ethiopians. That is a major challenge. Clearly maybe 50 or 60 million will be in the cities. You do not want to have the remaining population of a 100 million or so, in the highlands. The situation in the highlands is already unsustainable, and parts of the area are in a Malthusian trap with poor farmers eating up the land, with soil degradation and soil losses due to deforestation. So you have 30 or 40 million that have to be somewhere else. There is a lot of land in the country that is not used. There is a limit to how many livelihoods can be sustained on the highlands, and ways must be found to beat malaria and take advantage of the rivers in the fertile plains in the lowlands. There are three to four million hectares that could be irrigated. This is as much as there is in the rest of the continent. Q: Could resettlement have been better handled? A: Sure. We are doing our best with the other donors to make it happen better. But this is just the beginning. I have talked to peasants and farmers who really want to move. They say give us land, people know that the land is limited and that they can't just keep passing smaller and smaller plots to their kids. Q: What should the government be doing to improve the current resettlement drive? A: In the short term, make absolutely sure that the movement is voluntary and that farmers have full information. Before farmers move, the new settlement has to be certified as being up to certain standards. It has to have a clinic and the means to beat and treat malaria. You have got to have a school, give them tools, the right to come back. The government is putting these actions together. In the medium term, it is also important to invest heavily in education in food insecure areas so the farmers' options become broader. Q: Does demarcation of the border have any implications for funding? A: No not in the short term. Nobody wants to see another war so this has to be resolved. But at the same time we recognise a lot is at stake. You have to leave a lot of margins for the government if this is to be resolved properly. Certainly the way this issue is resolved affects funding in the medium to long term - there is no question about it. It is a very difficult issue.