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Liberalisation, Credit & Capital Markets - Corporate Governance Clichés in Public Administration

Corporate Governance Implication on Liberalisations: AABE-IFC-ACCA Panel Discussion
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Costy Costantinos

on 3 August 2018

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Transcript of Liberalisation, Credit & Capital Markets - Corporate Governance Clichés in Public Administration

Liberalisation, Credit & Capital Markets - Corporate Governance Clichés in Public Administration
The nation’s history is also punctuated by authoritarian culture over many centuries that outweigh its democratic credentials – to be a soldier, to bear arms and to fight has always been a mark of manly distinction. Indeed the belief the state is ultimately the panacea for all of its ills has run along much of Ethiopia’s history (Costantinos, 1996).
Global move to
‘State Capitalism’ & Developmental
States
In principle all states can be designated ‘developmental’ as they build economic infrastructure that the private sector may not be willing or ready to invest in. The news is citizens of industrial democracies are demanding their states to address crises that are munching on their livelihoods and the growing inequality resulting from global flows of goods, services, and capital.
They provide a means for raising funds to expand, modernize and facilitate the allocation of financial resources to accelerate industrialization;
They provide liquidity for investment in the economy that offer a measure of confidence and serves as an important barometer for the economy.
Through price mechanisms, they provide industrial governance with some idea of the current cost of capital - determining level and & of investment;
They act as reliable medium for broadening the ownership base from the erstwhile family dominated to public companies; and
Capital markets facilitate privatization of SOEs: small investors have opportunities to buy shares in the privatized enterprises
Leaders MUST EMERGE that are responsible for breaking the boundaries of inward bound wisdom, of common sense (that is not common), of patterns of thinking and behaving, which, over the years, have built themselves into routines, which pacify people to dormancy.
This menu of
recommendations is therefore indicative of the highly involved nature of relational perspectives of financial markets and the development of the private sector.
Focusing on context in which a company operates inevitably means equipping leaders with a small number of competencies that will make a significant difference to performance.
Instead, what we often find is a long list of leadership standards, a complex web of dozens of competencies, and corporate-values statements.
Each is usually summarized in a seemingly easy-to-remember way and each on its own terms makes sense. In practice, however, what managers and employees often see is an
“alphabet soup”
of recommendations.
When a company cuts through the noise to identify a small number of leadership capabilities essential for success in its business—such as high-quality decision making or stronger coaching skills—it achieves far better outcomes

(Gurdjian, Halbeisen and Lane, 2014:2-3)
Thank you
costy@costantinos.net
These are management techniques and practices drawn mainly from the private sector, is in-creasingly seen as a global phenomenon. NPM reforms shift the emphasis from traditional public administration to public management. Key elements include
various forms of decentralizing management within public services,
increasing use of markets and competition in the provision of public services, and
increasing emphasis on performance, outputs and customer orientation.
The Ethiopian
'
Democratic' 'Developmental'
Unitary State

It has ideological and structural dimensions, a nexus that extricates it from other forms of government:
ideologically,

its mission ensures high rates of accumulation & structural change & social justice
Ideationally
, the élite camp augurs on state
capture & hegemony.

It is neither 'pluralistic'
nor 'populist'
Political leadership
Leadership of Corporate
Governance requires intimate knowledge of public
policy analysis, formulation,
and management and of
corporate strategic plans and implementing them.
leadership is above all responsibility; requiring appreciation of the greater importance of others over oneself. Therefore, it entails liability for those who are led. It becomes a discipline in its own right. There is no set of commandments with which the leader can arm themselves and be assured of success; nonetheless, they must always interrelate, familiarize, change, and transform themselves
Dialogue Supremacy:
Leaders are expected to develop the capacity, via statements and actions & symbolic gestures, to shape debate and dialogue
Moral high ground:
An inspiring ‘job description’ of leaders must be not only the power over discourse but also their ability to
shape morality,
to determine what is
socially acceptable, culturally sound
and
politically uplifting.
Leadership road towards a Meritorious State and Corporate Governance
Meritocracy:
Systems based on
ability rather than by ethnicity, partisanship or other criteria of induction to corporate leadership -

'Social Darwinism?'.
Breeding Corporate Leaders: Surveying the governance milieu and de-linking & reflecting from routine jobs
The governance milieu in which a corporate leader acts is a critical component of successful leadership as great leaders in one context do not inevitably achieve well in a different context
The issue of economic liberalization in Ethiopia is complex. Hence, the research questions augur on the rationale and justification for economic
liberalization, viz.
What lessons are drawn for corporate governance of liberalization & founding credit & capital markets?
What can we learn from corporate governance that has migrated to NPM and PCT?
How can liberalization of SOEs and Financial trajectories advance the GTP in Ethiopia?
Credit &
Capital Markets
Financial intermediation, economic growth, mobilization of savings, it transfers savings from surplus to deficit sectors and the internationalization of stock exchanges
Full Divestiture
Partial Divestiture
Continuing State role
Management / worker buy-outs
Objectives of Liberalization
Costantinos Berhutesfa Costantinos, PhD
Professor of Public Policy, & Chairman Ethiopica Infrastructure & Tunneling Co
Corporate Governance Implication on Liberalization: AABE, ACCA & IFC Panel Discussion, Hilton Hotel,
August 3, 2018
Citizens expect their states to deal with surging immigration, global warming, and other knock-on effects of a globalized world but states are not up to the task. Globalization is diminishing the West’s traditional sway over world affairs;

The inability of states to address public demand has, in turn, only increased popular disaffection, undermining the legitimacy and efficacy of institutions.
This crisis comes at a time when international system is in the midst of tectonic change due to the diffusion of wealth and power to new quarters. Globalization was to have played to the advantage of liberal societies, instead, the masses have been particularly hard hit -- because their economies are both mature and open to the world.
State capitalism has its distinct advantages; as a consequence, it is not just the West’s material primacy that is at stake but also the allure of its version of modernity. Unless democracies can restore their solvency, the geopolitics, of the 21st century may well be up for grabs (The Economist, 2012:1).
Capital markets are important in the mobilization of savings for investment. The liquidity of stock exchanges provides opportunities for small and big savers to choose to hold their savings in either cash or securities or both.
Corporate Governance
The OECD
Principles of
Corporate
Governance
The rights of shareholders and key ownership functions
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights
Equitable treatment of shareholders
Disclosure and transparency and the responsibilities of the board

Public Choice theory
is the application of
economics
to the study of
public administration
. Public choice is the economic study of non-market decision making or simply the application of
economics
to
political science
, challenging the traditionally established
public interest theory
of democratic state which holds that decision making in government is motivated by
'selfish benevolence'
by elected representatives or state employees.
Statement of the problem, research questions, objectives and methodology
Ethiopia’s financial sector remains closed,
Ethiopia has no capital market and very limited informal
investing in shares of private companies. A series of financial
sector reforms has been introduced since 1992, when private banks were allowed to be re-established. Nevertheless, the large state-owned banks continue to dominate the market in terms of capital, deposits and assets. The state says it is committed to alleviating poverty through private sector development and integrating Ethiopia into the global economy, however, it was not prepared to privatise SOEs, land, or open the financial sector to foreign competition (Kiyota, et al., 2007: 5).
The crisis of the welfare state
The crisis of the welfare state has led pundits to questions on the role and institutional character of the state hence current discussions of corporate governance are generally marked by several limitations.
a tendency to narrow corporate governance to the terms and categories of immediate, not well considered, human action, a naïve realism, as it were;
inattention to problems of articulation of corporate governance within established political structures and processes rather than simply abstract possibilities;
a nearly exclusive concern in certain institutional perspectives on corporate governance with generic attributes and characteristics of states and consequent neglect of analysis of their specific strategies and results;
inadequate treatment of the role of international agencies

(Costantinos, 1996:451-453)
Liberalization of SOEs
Liberalization has become a central element of the structural reform agenda to divest SOEs. The financing of SOEs losses through the state banking system has increased intermediation costs, reduced the private sector’s access to credit, and threatened overall financial sector viability. Hence, the numerous attempts to reform SOEs by imposing hard budget constraints, exposing them to private sector competition and crafting institutional changes has produced meager results.
Background music 'Meskerem' by Elias Negash
The Ethiopian state has featured parochial
narrative on its macro-economic successes ignoring pitfalls of a trial and error policy-making. If it is not be deified into some kind of invincible and sagacious Goliath that gets what it wants, then structural dynamics & heterochthonous factors can scupper structural transformation. Political will and technical capacity may simply prove inadequate to fend off heterochthonous forces that perpetuate the
regime's rule indefinitely
The GTP’s ambitious spending plans may be outstripping the absorptive capacity of the economy, which is already stretched. The financing needs for the public sector will crowd out private sector credit & strain debt sustainability on the external side. Furthermore, the GTP’s let-down will hinge on high state spending and the virtual absence of the measures to allow room for the private sector to thrive and as a result, generate more growth and help GTP achieve its goals.
Recent allegations of embezzlement, loan fraud and graft in state institutions has brought the issue of corruption to a new level of alarm and remains a major obstacle to development and democracy.
the imperative of the massive bureaucratic machine is to command and control, preoccupied with its own survival and enrichment, as the state had proved to be the main channel for personal wealth accumulation and securing privileged positions;
As the winner takes all and the looser is consigned to the political and economic wilderness, all the brutality of bitter fights ensure in every competition for personal and group accumulation of resources.
Impediments to meritorious civil service are rampant, literally most services delivered by the state’s poorly remunerated civil servants thereby creating a
‘Rent Seeking State’
inimical to good governance and peace & security.
Finally, it is expected that Ethiopia will tackle the issues based on the realities of its own socio-economic environment.
For the 'rent-seeking' state and its stalwarts,
profits are evil, and that the search for profits involves, in one form or another, the exploitation of the rest of society. Things done in the public sector tended
ipso facto
to be viewed in a positive light; those done in the private sector were correspondingly viewed with suspicion. The idea that market forces could bring about a socially desirable outcome is given almost no credibility at all
(Harberger, 2010:4).
An efficient and a development-oriented private sector provide the nourishment which CCM markets require to grow and function effectively.
The markets themselves provide the credit ingredients which the private sector requires to grow expand and contribute to national development.
Thus, there is a reciprocal and mutually productive relationship between the private sector on the one hand and liberalization and CCM governance, on the other.

Corporate governance has become important trajectory in public administration as both developed & under-developed nations are increasingly involved in economic governance of nations.
Research Questions
achieve higher allocative and productive efficiency - to increase output & lowering prices (allocative efficiency) as well as through a more efficient use of resources (productive efficiency);
strengthen the role of the private sector;
improve the public sector's financial health and to free resources for allocation to social policy areas, public sector finance, reduction of borrowing requirements...
Corporate governance refers to the structures and processes for the direction and control of companies. It concerns relationships among the management, board of directors, controlling and minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing performance and increasing access to capital.
The role of stakeholders in corporate governance
New Public Management & Public Choice Theory - lessons from Corporate Governance
The Washington Consensus
fiscal policy discipline and redirection of public spending from subsidies, pro-poor services,
tax reform, market determined interest rates - positive in real terms; competitive exchange rates,
trade liberalization, liberalization of inward foreign direct investment; privatization of state enterprises,
deregulation, prudent oversight of financial institutions, and legal security for property rights;
The Washington Consensus has been the target of sharp criticism by some individuals and groups who argue that it is a way to open up less developed countries to investments from large multinational corporations
The 21st Century has ushered in a time of unprecedented global wealth and extraordinary opportunities; but Ethiopia has yet to benefit from this. In this globalization of prosperity, an important dimension that features prominently in the discourse is the relative contribution and weight of international trade and mechanisms for democratic development. Hence, the critical question is how is Ethiopia to be gainfully integrated into the global economy without first achieving crucial human security nationally and economic and industrial integration within the region itself?
Forging ahead:
Leadership & Governance for Liberalization & CCM
in Ethiopia
Maghreb
ECCAS

Governance of liberalization & Credit & Capital Markets should be viewed from the perspective of that Ethiopia is yet to establish these processes, hence
State good will is paramount:
Acknowledgment of the importance of liberalization and capital markets in fostering national economic development, appropriate institutions must be developed given the peculiar circumstances;
Entrepreneurship promotion:
There must be an enabling environments for the rapid growth of the vibrant private sector would accelerate development of markets
Regulatory & Legal Framework
Human Resources Deve. & Technical Cooperation
Corporate Governance & Leadership
One must legitimately expect leaders to develop the capacity to effect change; however constrained they are by ideologies and agencies that inform the political parties they derive their power from.
Notwithstanding the influence of the wider economic and political environment in Ethiopia, and the nature of their constituency and political organization, there is the dire need for an understanding of both their agency and ideology because each determines the other.
Official power
Robbery of State Funds
Public Policy & Governance options
in Divestiture
Financial intermediation is critical precondition of economic growth.
Besides the mobilization of savings, it transfers savings from surplus to deficit sectors and by doing so enhances new investments that accelerate growth.
With the internationalization of stock exchanges, foreign investors can buy shares and stock without visiting Ethiopia,
The inflow of foreign investible funds increases resources available and facilitate debt conversion schemes - the debt overhang has become legendary.
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How can capital markets support the GTP
References
SOE Reform in China:
China launched a major economic reform and liberalization that transformed the productivity of the Chinese economy. China’s approach to ownership in agriculture took place early in the reform process, and was more widespread and swifter in pace. All farmland was “de-collectivised,” and allocated to family units, affecting 800 mil-lion people. These reforms were revolutionary, affecting the lives of a populous sector, in 1978, accounting for 71% of employ-ment in China. SOE productivity in the industrial sector was increased by gradually freeing prices and decentralising decision-making. At the same time, government created forms of indus-trial ownership, particularly at the local level, that successfully combined elements of collective and private property. Lately, new private entry and foreign direct investment were permitted. All of this proved efficacious and changed China’s economic landscape. In 1998, the non-state sector including private agri-culture) accounted for 62 % of GDP, while the share of SOEs in industrial output declined from 78 % in 1978 to 28 % in 1999.

It is to be recalled that in June 2018, Executive Committee of the EPRDF has decided to transfer partial and full stakes in the government-owned enterprises including Ethio telecom, Ethiopian Airlines, Ethiopian Shipping & Logistics Service Enterprise, Ethiopian Railway Corporation, the various sugar projects under development, industrial parks as well as some of the hydroelectric power plants. From the stated enterprises, those such as Shipping Enterprise, Railway Corporation and the Sugar projects – which fall under the supervision of Ministry of Public Enterprise (MoPE) – are not going to be transferred to private ownership in the coming one year, if the ministry’s plan for the upcoming budget year is something to go by. The reforms introduced by the party seek to open up the space to the private sector to invest in government projects and companies including railway, sugar, industrial park, and hospitality. “This will create an inclusive growth,” reads the statement issued by the party, at the time. In addition, the reforms are said to boost the country’s foreign currency generating capacity and ease the cost of living. The government will remain a majority shareholder in the aforementioned enterprises, the statement noted further. The aforementioned SOEs, which fall under the jurisdic-tion of the ministry, are not included in the list of SoE’s up for privatization this year,” said Wondafrashe Assefa, of MoPE (Reporter, 28 July 2018:).
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