1974 and the Logic of the Command Economy

The Wollo famine as political detonator

Begin with the famine. The 1972–73 Wollo famine killed an estimated 200,000 people, possibly more.¹ Its causes were principally drought and the collapse of grain trade in affected areas; its political consequence was the delegitimisation of Haile Selassie’s government, which discovered the famine through foreign television cameras rather than its own civil service. Jonathan Dimbleby’s October 1973 ITV documentary, The Unknown Famine, screened to Ethiopian audiences edited together with footage of an imperial banquet, did more than any pamphlet or speech to convince the country that the old regime had to go.²

The point worth seeing here is that the regime that fell in 1974 fell, in significant part, because of a failure of information. The imperial bureaucracy did not know what was happening in Wollo until foreign journalists told it. Its monetary and pricing systems contained no signal that would have transmitted the gathering disaster to the centre. By the time the centre acted, the deaths had already occurred.

This matters for the monetary history because the Derg’s economic policies, which dismantled the imperial monetary order, were a response to this informational failure. The new regime promised to do better. It promised to know the country, to plan it, to feed it. The promise was not cynical. It was, in the conditions of 1974, popular and intellectually serious. The problem this series will track, in twenty-three further articles, is that the proposed solution made the informational problem worse.

The intellectual background

The Derg — kifle dej, the “committee” of junior military officers that emerged from the September 1974 deposition of Haile Selassie — was not, initially, ideologically programmatic. It was a coalition of officers united more by what they were against (the old regime, its corruption, its inability to manage the famine and the rising urban discontent) than by a positive economic doctrine.³ The November 1974 Ethiopia Tikdem (“Ethiopia First”) declaration, drafted under pressure from radical civilian intellectuals, gave the regime its first programmatic statement; the December 1974 declaration of “Ethiopian Socialism” — a deliberately vague formulation — committed it to state ownership of major sectors of the economy.⁴

The intellectual content of “Ethiopian Socialism” came from the Ethiopian student movement, principally the wing of it that had been radicalised at Addis Ababa University and at American and European universities in the 1960s. The reading list was standard for the period: Marx and Lenin, but mediated through the New Left of the 1960s, through dependency theory (Frank, Wallerstein, Amin), and through the African socialism that Julius Nyerere had been articulating in Tanzania.⁵ What this body of thought shared, across its variations, was a specific diagnosis of African economic underdevelopment that pointed to a specific monetary corollary.

The diagnosis was that Africa was poor because it was integrated into the world economy on disadvantageous terms — as a producer of low-value primary commodities, dependent on the prices set by industrial-country buyers, vulnerable to terms-of-trade shocks the country could not control. The corollary was that escape from this integration required the state. Only the state, the theory ran, could mobilise resources at the scale needed for industrialisation; only the state could insulate the domestic economy from world prices long enough for new industries to grow; only the state could redistribute wealth from the rural surplus to urban industrial investment; only the state could ensure that the gains from growth went to the country rather than to foreign capital.

This is not a strawman. It is the strongest version of the case the radical Ethiopian intelligentsia made in 1974, and it deserves to be stated at its strongest because much of it was true in its diagnosis even when wrong in its prescription. Ethiopia was integrated into the world economy on disadvantageous terms — its coffee exports faced volatile prices, its imports of capital goods were expensive, its room to manoeuvre on its own development was limited. The diagnosis was correct. The dispute is about the prescription.

The monetary corollary

What this diagnosis required, monetarily, was specific and substantial. State-led industrialisation needed money. It needed credit, on a scale the colonial-era banking system could not provide. It needed foreign exchange, allocated to the priority sectors rather than to whatever was most profitable. It needed prices that the state could set rather than the market — both to insulate domestic producers from import competition and to extract surpluses from the rural sector for urban investment. And it needed all of this without imposing the burden of taxation on the urban political base whose support the regime depended on.

The monetary corollary, in other words, was: expand the state’s role in the financial system, ration foreign exchange, fix prices, and finance the resulting deficit through the central bank. Each of these had a rationale within the framework. None was monetary mischief for its own sake. Each was the logical implementation of the development model.

What was missing from the framework was Friedman’s empirical observation and Hayek’s theoretical one. Friedman’s observation was that monetary expansion above the rate of output growth produces inflation, regardless of the goodness of the cause it is funding. Hayek’s observation was that the price system performs an informational function that is replaced by nothing when the state suppresses it — the dispersed knowledge that prices would have transmitted does not get transmitted some other way; it simply does not enter anyone’s decisions. Both of these were known in 1974. The Ethiopian student movement, to the limited extent it engaged with them, dismissed Friedman and Hayek as ideological writers serving capitalist interests.⁶

That dismissal was the intellectual error. Friedman’s claim about inflation is not ideological; it is the result of looking at money-supply data and price data side by side across a century and a dozen countries and observing the correlation. Hayek’s claim about prices is not a defence of capitalism per se; it is a claim about how complex systems aggregate information, and it applies to socialist planning the same way it applies to a corporate bureaucracy. The Derg’s planners did not have to like Friedman or Hayek personally to take their empirical claims seriously. The cost of not taking them seriously would be paid in money and lives.

The legal architecture, 1975–76

The Derg made its monetary commitments through a series of proclamations in 1975–76 that this article and the next together trace through. The land reform of March 1975 abolished private ownership of rural land, declaring all land state property and giving usufruct rights to peasants through state-organised “peasant associations”.⁷ This is usually treated, correctly, as a social-policy revolution; for monetary purposes, what mattered is that it eliminated land as collateral for credit and thereby destroyed the basis on which a private banking system could lend to farmers. The decision to nationalise land was a decision, downstream, to make state banks the only available lenders to the rural majority of the population. We will return to this in article 13.

The financial nationalisation of January 1975 nationalised all private banks and insurance companies — the Addis Ababa Bank, Banco di Roma, Banco di Napoli, and a handful of smaller institutions — folding them into the Commercial Bank of Ethiopia, the Addis Ababa Bank, and three insurance companies that the state now owned.⁸ The Agricultural and Industrial Development Bank, later renamed the Development Bank of Ethiopia, became the state’s main vehicle for directed lending to industrial and agricultural projects of state interest. The National Bank of Ethiopia remained the central bank in name but became, in effect, the cashier of the state.

The proclamation of February 1975 nationalised all major industrial enterprises and all “extra” residential and commercial property — buildings beyond a certain threshold owned by any single citizen.⁹ The combined effect, by mid-1975, was that the state directly controlled the financial system, the industrial sector, urban commercial property, and rural land. The private sector that remained — small farmers operating under usufruct, small traders, the informal economy — was excluded from the formal credit system because it had no collateral the state would accept and no political access to the state allocation mechanisms that replaced collateral.

The Agricultural Marketing Corporation

The piece of the architecture worth introducing here, before the next article gets to its full consequences, is the Agricultural Marketing Corporation (AMC), established by proclamation in 1976.¹⁰ The AMC’s mandate was to purchase grain from peasant farmers at fixed government prices and resell it at fixed prices to urban consumers and the army. The premise was redistribution: extract a surplus from the rural sector at low prices, deliver it to the urban political base at low prices, finance the resulting fiscal gap through state-bank credit and central-bank advances.

The mechanism deserves naming because it is, in compressed form, the policy logic this whole series is about. The AMC suppressed the price of grain — both the price farmers received and the price urban consumers paid. What the suppression did, in Hayekian terms, was destroy the information that grain prices would have transmitted: about the relative scarcity of grain in different regions, about the relative productivity of different farms, about the relative urgency of investment in storage and transport. The state replaced the price signal with administrative directives — quotas, ration cards, regional allocations — that necessarily knew less than the dispersed market would have known. The informational gap had to be filled by bureaucracy, and the bureaucracy filled it badly.

What the AMC did, in Friedmanian terms, was load fiscal pressure onto the monetary system. The gap between what the AMC paid farmers and what it charged urban consumers was a subsidy, and the subsidy had to be financed. It could have been financed through taxation — but the Derg did not want to tax its urban political base, and could not effectively tax its newly-collectivised rural one. So it was financed through state-bank credit, which is to say, through central-bank advances, which is to say, through the printing press. The inflation that would arrive in the 1980s was, in this sense, baked into the AMC’s design.

The honest counter-case

A serious case must engage the strongest opposing reading, and the strongest opposing reading is this: the Derg’s economic architecture, whatever its eventual problems, was a coherent response to a real diagnosis. Imperial Ethiopia in 1974 was a country where the top 1 percent of landlords held 75 percent of the land, where the rural population had no political voice, where industry was largely foreign-owned, and where the state extracted little revenue and provided few services. The radical critique was not made up. The land reform that the Derg implemented — for all its eventual problems with collateral and credit — gave land to peasants who had been tenants for generations. The literacy campaign, however coercive, raised adult literacy from below 10 percent to over 30 percent in a decade. The nationalisations transferred real wealth from a tiny elite to the state, which used at least some of it for actual development purposes. None of this should be flattened into a caricature of Stalinist mismanagement.

The series’s reply is not to deny any of this. The monetary failure of the Derg is a different question from the social-policy ambitions of the Derg, and the failures of the first do not erase whatever the second accomplished. What this series argues is narrower: that the monetary architecture chosen in 1975–76 was not necessary to the social reforms. It was possible, in principle, to nationalise land without destroying the credit system that depended on land collateral, by replacing collateral with something else (group lending, output-based credit, the kind of arrangements microfinance later developed). It was possible, in principle, to subsidise urban food consumption without making the central bank pay for it. It was possible, in principle, to insulate the domestic economy from world prices without printing money to do it.

What the Derg’s planners did was take the most expedient version of each policy choice and assume the monetary consequences could be managed later. They could not. The monetary consequences became, by the mid-1980s, the binding constraint on everything else the regime wanted to do — including, eventually, on its capacity to feed the population in a drought year. The next two articles trace how that happened.

The 1974 revolution was a real political moment. The economic architecture it built was a real intellectual choice. Both can be acknowledged. What follows is the cost.

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Footnotes

1. Mesfin Wolde-Mariam, Rural Vulnerability to Famine in Ethiopia, 1958–1977 (Vikas Publishing House, 1984), giving the conservative 200,000 figure; some estimates run higher. ↩

2. Jonathan Dimbleby, The Unknown Famine, ITV broadcast, October 1973. The documentary’s later use by the Derg to discredit the imperial government is documented in Andargachew Tiruneh, The Ethiopian Revolution 1974–1987 (Cambridge University Press, 1993). ↩

3. Andargachew Tiruneh, The Ethiopian Revolution, chapters 1–3; Christopher Clapham, Transformation and Continuity in Revolutionary Ethiopia (Cambridge University Press, 1988), chapter 2. ↩

4. Andargachew Tiruneh, The Ethiopian Revolution, chapter 5; the Ethiopia Tikdem programme is reproduced in Bahru Zewde, A History of Modern Ethiopia, 240–241. ↩

5. Bahru Zewde, The Quest for Socialist Utopia: The Ethiopian Student Movement c. 1960–1974 (James Currey, 2014). The intellectual influences are documented in chapters 4–6. ↩

6. This is not a controversial claim about the Ethiopian student movement; it tracks the general intellectual posture of the African and Latin American left of the 1960s and 1970s. See Bahru Zewde, The Quest for Socialist Utopia, chapter 6. ↩

7. Proclamation No. 31/1975, “A Proclamation to Provide for the Public Ownership of Rural Lands,” 4 March 1975. Discussed in Dessalegn Rahmato, Agrarian Reform in Ethiopia (Scandinavian Institute of African Studies, 1984). ↩

8. Proclamation No. 26/1975, “A Proclamation to Provide for the Government Ownership of Banks, Insurance Companies and Financial Houses,” 1 January 1975. See Eshetu Chole, Underdevelopment in Ethiopia, chapter 5. ↩

9. Proclamation No. 47/1975, “A Proclamation to Provide for the Government Ownership of Urban Lands and Extra Urban Houses.” ↩

10. Proclamation No. 105/1976, establishing the Agricultural Marketing Corporation. See Dessalegn Rahmato, Agrarian Reform in Ethiopia; and Britannica, “Ethiopia — Socialist Ethiopia, 1974–91,” https://www.britannica.com/place/Ethiopia/Socialist-Ethiopia-1974-91. ↩