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On Berbere and Ethiopian Economics By: Hiruy Kebret The Ethiopian must be getting stronger. I remember 10 years ago, it took the Zebegna and Serategna to carry 100 birr worth of groceries. Today a ten year old can do it alone. I suspect it must be the berbere. It is laced with steroids strengthening the 10 year old. Why would berbere cost so much then? Am I missing the real point? Of course, since the real issue here is inflation. Indeed, 100 birr could have bought a lot 10 years ago; today it can hardly afford an average Ethiopian family a decent bag of groceries. Inflation, the rise in the amount of money circulating in a given economy, over a certain period of time, most usually resulting in the rise of prices, is most accurately measured as a percentage. The inflation rate for Ethiopia in 2007 was 13%. Most economists agree that high rates of inflation are caused by high rates of growth, especially in the money supply. Well, it is no secret that there is growth in Ethiopia. Actually, in the past 10 years, Ethiopia’s GDP grew an estimated 4.4% according to international sources and 8.5% according to national sources. I will settle for 6% so as not to offend my friends home or abroad. The increase in the price of goods and services being tied to economic growth strikes me as a tough reality to swallow. Especially for us Ethiopians, given the rate of poverty our people suffer from. Nonetheless, the country continues to grow at a commendable “6%” rate. And might I remind you we do not have oil that sells at $100 per barrel. This growth is fuelled by an agriculture driven economy, testimony to the real heroes of Ethiopia, the gebere. Consequently, if inflation is the price to pay for economic growth and the uplifting of our people out of poverty, so be it. But does it have to be at 13% inflation rate? In matters of economics, most people have a tendency to make rush judgments and thoughtless conclusions from important facts. Missing the real point in economics can hurt consumers, investors and governments. Especially when the entire crowd misses the real point, economic crisis follow closely behind. Most recently, one such thinking that led to economic crisis went as such. Home prices will always increase. It is only natural that as home prices increase, I should join the masses and invest in a house. Even if I cannot afford the mortgage payment (well, they gave me a loan so they think I can afford it), I will just turn around and sell it for a big profit. Such is the dull economic thinking that has created the sub-prime crisis in the U.S. Just as a housing bubble was created in the U.S, bursting most recently with sky high default rates, unraveling of predatory lending practices and loss of much equity, a similar real estate bubble is being inflated in Ethiopia, mostly Addis Abeba. Whether in the U.S, U.K or Ethiopia, dull economic thinking does not discriminate by race, gender or nationality. People are not immune to optimistic view of economic gains, causing a frenzy to buy, buy, buy. Irrespective of the value, they just want to buy. Thinking they will sell at a profit. This thoughtless optimism is also referred to as human greed. It happens to the best of us. We see our friends make investments, we see them buy, we see them sell, we want to do the same and in the frenzy, we lose our ability to think. We become greedy. As such and unknowingly, the Ethiopian Diaspora is fueling parts of the real estate bubble in Addis Abeba and Ethiopia. Whereas, locals are also joining the bubble as investors, buyers and sellers indulging in the practice with no strict oversight. Some will make money, many will be priced out of the inflated market of real estate and lots will see the value of homes deteriorate. As the current real estate bubble continues in the Addis Abeba area, the current millennium extravaganza also helped fuel the incredible rise in berbere prices. Not that the average Ethiopian had not noticed prices for most food categories constantly increase in the past 8 years. But true to our Ethiopianess, it took berbere to catapult inflation into our economic debate. Demand pull inflation is most prominent in the real estate market of Ethiopia where as cost-push inflation is creating carnage in food prices. With demand-pull inflation, consumers (with their money or borrowed money) cause an increase in demand, such as the increase in demand for real estate currently undergoing amongst Ethiopians at home and in the Diaspora. This increases the prices of homes which is normal. The bubble starts when greed kicks in and abnormal pricings are justified regardless of the value. Houses in Addis Abeba are currently selling in millions of birrs, I have yet to see the reflection of their values in the prices. Cost-push inflation is better explained and known as supply shock inflation caused by a drop in supply, i.e. berbere. There are many other supply shocks in Ethiopia, such as cement, relating again to the real estate boom. Either way, real estate pull or berbere push, proper oversight of the real situation is important in order to make good use of our investment and clear head thinking is crucial in order to get stronger. Growth and inflation go hand in hand, but like gaining strength, one hand lifts equally to the other and a balance should be maintained. A GDP growth of 6% and inflation of 13% hardly looks balanced. Just as the body builder builds his muscles from skinny to buff through controlled use of diet and exercise, same applies to economic growth. A controlled use of GDP growth and inflation would be wise. And we might not even need to put steroids in our berbere.
T he opinion stated in the articles submitted to EthiopiaFirst (EF) are those of the writers and not EF or the publisher of EF.
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