Lesson from an Experiment in Ethiopia: An Economic Review of Arkabe Ogubay’s Case Study

By Asayehgn Desta, Sarlo Distinguished Professor of Sustainable Development
Tigrai Online, Dec. 23, 2017

A specter haunts Africa today. Those who subscribe to the Afro-pessimism school of thought argue that while African economies were ill-prepared to face the “free trade imperialism” of the 1850s, today’s Africa is even less equipped to survive in the new global economic order (Kofi and Desta 2008). Based on this line of thinking, for instance, Prunier  (2016) attributes Africa’s lack of development due to lack of genuine citizenry. As he puts it, those in power attempt to enrich themselves at the expense of the people, and they continue the practice of the European colonialists, turning the people into subjects. Furthermore, Prunier notes that the lack of industrialization in Africa has deprived its youth of a better future and left it in a constant state of poverty and unemployment (The African Blog, July 23, 2016).

The Afro-Optimists, on the other hand, argue that though the Africans were bitter in the past, Africa’s future is bright because the old elite is gone. Knowing what it wants and being unafraid to express it, Africa’s youth finds optimism from within. “African countries and people have the opportunity to have the future they want. They are not trapped in history” (The African Blog, July 23, 2016).

To industrialize Africa, the African Development Bank has recently identified the following development priorities for the 21^st century: 1) Industrialize Africa, 2) Light up and power Africa, 3) Feed Africa, 4) Integrate Africa, and 5) improve the quality of the life for the people of Africa” (www.afdb.org, November 20, 2017).

In his forward to the book, Industrialize Africa: Strategies, Policies, Institutions, and Financing (Nov. 2017), President of the African Development Bank Group, Akinwumi Adesina, advocates that “Africa, must quit being at the bottom of the global value chains; instead, Africa needs to move rapidly industrialize, with value addition to every everything that it produces and work for itself and its people, instead of exporting wealth to others” (Industrialize Africa, 2017).

In his introductory remarks to Industrialize Africa…, Stiglitz argues that, in order to go through the industrialization process, Africans must pay attention to structural transformation that could galvanize Africa’s move toward 1) a green economy, 2) a learning society, 3) an innovation economy, 4) industrialization using labor-intensive manufacturing, 5) the development of building clusters and special economic zones, and 6) the development of industrial parks that could encourage innovation, and 7) a cleaner and safer environment.

In his article, “Ethiopia’s Lessons from An Experiment.” (Industrialize Africa…, 121-141), Dr. Arkebe Ogubay, Minister and Special advisor to the Prime Minister of Ethiopia, explains that while structural drivers for longer-term economic development have been inadequately designed, the African lions are on the rise. Ogubay succinctly rests his argument by noting that Ethiopia has been achieving rapid economic growth over the past two decades; however, due to the lack of effective industrial policies and state activism, Africa has made inadequate structural transformation.

Going one step further, Ogubay argues that, as the drivers of economic and social development, changes in social structural involve the movement of people and outputs across sectors and within specific industries, and therefore a shift from lower to higher productivity economic activities. More specifically, Ogubay believes that Africa can sustain growth and structural changes when driven by manufacturing, a rapid expansion of exports, and substantial changes in the composition of those exports (p. 122).

Underlying this conceptual framework, Ogubay’s case study sought primarily to review the practice of industry policy and to point out the uneven outcomes in Ethiopia by specifically investigating the following industrial sectors: 1) capital-intensive, import-substitution, such as the cement industry, 2) labor-intensive and export-oriented sector, such as leather and leather product, and 3) high productivity modern agriculture, such as the floriculture or horticulture sector.

Import Substitution or Inward Looking: The Cement Industry

As Ogubay observes, as the demand for cement increased in Ethiopia due to a substantial growth in government-sponsored infrastructure and integrated housing programs, the supply by the single state-owned enterprise (SOE) could not meet the demand. To substitute the imports of cement at a higher price, the Ethiopian government focused on an import-substitution, or inward-looking, cement manufacturing strategy to stimulate new domestic cement manufacturing.

To encourage the growth of cement factories, the Ethiopian government offered factory land and other domestic raw materials (quarries, such as limestone, gypsum etc.), rendered electricity supply below market prices, and also provided “three-year, zero-income tax incentives to public enterprise to invest on the production of cement. Thereby, Ethiopia’s installed cement producing capacity increased from 3 million to 15 million tons between 2005 and 2016, “making Ethiopia one of the top three producers in sub-Saharan Africa” (p. 124).

However, since the newly established cement factories in Ethiopia more recently were capital intensive, the cement industry employed less than 15,000 workers. Not only did the price of cement in the market decline, the cement industry created substantial backward and forward linkages, wiping out small domestic industries in the country. In addition, Ogubay asserts that, unlike in South Korea and China, the Ethiopian cement industry could not serve as a basis for developing technological capabilities due to lack of “…effective policy instruments to encourage domestic manufacturing of equipment, local content, and local capabilities” (p. 125).

Since Ogubay has told his readers previously that the big, state-financed cement industries contributed to ‘crowding effects” of small cement companies by lowering the prices of cement, he appears to contradict himself when he claims, “an activist state can, through effective industrial policies, transform an industry that is strategic to industrial catch-up” (p. 125).

Export Promoting through Leather and Floriculture Sectors

Despite constant reminders of the limits of employment, output, export, and value addition in the leather and leather product industry, Ethiopia’s industrial policy has depended for centuries on the export of leather and leather products to earn foreign exchange. Because many believe the leather industry has very strong backward linkage with agriculture, its forward linkage potential is weak and requires effective state-industry relationships. For example, between 1992 and 2015, “growth of manufactured outputs in the leather sector was sluggish and showed erratic fluctuation” (p. 127) because the government followed policy instruments unsupported by reciprocal control policy mechanisms (such as incentives for example given to floriculture (p. 129).

Possibly learning from the leather industry, the Ethiopian government began restructuring its industrial policy, thereby providing incentives, such as affordable land lease (primarily within a 200-km radius of Addis Ababa) at a reasonable rate and providing subsidized loans (to more than 40 firms) for foreign direct investors to start investing in floriculture (horticulture) venture. Thanks to Ethiopia’s natural endowments, its competitive labor costs, its geographic location, climate, water, attitudes, and soil, the floriculture investment in Ethiopia flourished.

Not only has the floriculture recently contributed to diversifying Ethiopia’s export, but it has also become an important contributor to Ethiopia’s balance of payment. As a result, Ethiopia has emerged globally as one of the top five cut-flower players (p.126). In terms of its forward linkage, export of flowers to foreign countries has enabled Ethiopian Airlines to increase its cargo capacity, and to expand its cool chain storage (p.128).

Despite these positive achievements, Ougbay laments that the government industrial policy missed a golden opportunity when it failed to provide more land for expansion to these types of enterprises and for the export of non-floriculture exports (herbs, vegetables, fruits) that had huge export potential (p. 128).

So, what have we learned from the Ogubay’s case analysis?

Conclusions

Based on the three sectors (Cement, Leather and leather product, and floriculture or horticulture) Ougbay analyzed, we can learn that, despite being under a single industrialization strategy, the growth performance and policy outcomes in the three-selected case studies were uneven.

As a combination of capital deepening big corporations, the import-substitution cement industry contributed to lowering the domestic prices of cement. Its high growth rate contributed to a significant savings on foreign exchange for Ethiopia. The backward and forward linkage of the cement industry was also very strong. However, the cement industry significantly contributed to the crowding out and eventually wiping out of minor cement domestic industries that could not compete with the monopolistic companies.

The export-oriented leather industry demonstrated a complementarity between manufacturing and agriculture. However, the leather industry indicated a weak coordination among government offices. Most of the institutes’ efforts addressed short-term goals. The internally fragmented leather and leather products path dependency (low value addition and fixed mindset), undermined collective learning and did not contribute to backward and forward linkages.

In the case of the export-oriented floriculture or horticulture industry, Ogubay saw a golden fit between government and industry. Because they trusted and learned from each other, the domestic floriculture firms viewed the horticulture FDI firms as sources of technology and market capability. As a student of neo-classical economics who favors the activities of multinational organizations, Ogubay shows that the horticulture industry contributed to backward and forward linkage. Meanwhile, the industry’s production output, export earnings, and employment creation remain substantial (pp. 133 & 138).

Despite rapid economic growth in Ethiopia, Ogubay maintains that Ethiopia’s structural transformation has been inadequate. Rapid growth was not tantamount to a shift in the share of manufacturing in employment, and output, export, and agriculture continued to employ three-quarters of the population, accounting for 37 percent of GDP (pp. 134-35). Thus, Ogubay stresses that, like Taiwan, China, and South Korea, Ethiopia must follow the role of the state in development. During this stage, the Ethiopian government must play a pivotal role to establish trust, structural transformation, and industry policy in the three-industrial case studies. In short, Ogubay insists that Ethiopia needs to set a coherent vision and develop strategies to effectively mobilize its society and resources.

Ogubay notes that recently, the Ethiopian government has recognized that undertaking structural transformation is the path to sustainable growth. Because of this challenge, Ethiopia has profoundly shaped the development of a ten-year plan. Ethiopia’s Vision 2025, which aims to make Ethiopia “the leading manufacturing hub in Africa” puts greater emphasis on expanding manufacturing output and large-scale growth in industrial employment” (pp. 134-135).

Though not strongly stressed in this article, as the guru of Industrial Parks (established in the Ethiopian cities of Hawassa, Kombolcha, and Makelle) Ogubay’s trajectory implies that Ethiopia must learn first-hand from China, South Korea, and Singapore to establish eco-friendly industrial parks. Through innovation, the industrial parks could enhance Ethiopia’s exports, transfer technology, generate employment, and achieve middle-income status by 2025 (Desta, 2017). Using several hallmarks of scientific research methods (purpose, rigor, replicability, objectivity, etc.), a brief analysis of Ogubay’s case study follows.

Review

Ogubay’s introductory section of the case studies is exciting and inventive. The introduction provides well-documented studies to its readers; however, Ogubay should avoid using the lofty and possibly “experiment” in his title. By contrast, a simpler title like, “Ethiopia’s Industrial Policy: Lessons from three Case studies” could draw attention and trigger curiosity. In short, after reading the introduction, readers could predict the content of the report.

Ogubay clearly articulates the purposes of his study. His statements of the study’s purpose are specific, measurable, achievable, and relevant to the content of the article; however, adding some research problems would have added clarity to the introductory portion of the study. Therefore, I suggest that Ogubay add a research problem(s) to the end of the introduction and enlighten his readers by stating his rationale for choosing the three industries for his case study.

The review of the literature is rigorous. Ogubay has cited more than enough documents related to classical and neo-classical economic or conventional studies. However, at the end of his literature review, Ogubay could have helped readers by mapping out the theoretical framework pertinent to the study. In short, Ogubay needs to incorporate the operational definition of both the dependent, independent, and moderating variables given in Appendix 1. Then, he could have stated his analytical model to show that Policy Outcomes are a function of industrial structure, linkage dynamics, political economy, and policy instruments. Had Ogubay included indicators related to environmental effects, the value of the outputs (production output, export earnings, employment creation, total economic output) would have changed substantially, and it would have provided a road map to replicate the study.

As mentioned above, the study’s most glaring limitation is that Ogubay’s analysis is based on conventional (neoclassical) economic analysis. In other words, he bases his analysis on 1) market prices being good indicators of scarcity, the market system being effective, and information being conveyed swiftly; 2) resources having high rates of substitution, and 3) technological development saving us from scarcity of resources (see for example, Desta, 1999). In short, I am amazed to notice that Ogubay never cared to incorporate the theoretical framework or “promoting Sustainable Industrial Policy” initiated by Stiglitz as stated in the introductory portion of the book. Also, since the Environmental Policy for the Federal Democratic Republic of Ethiopia were approved by the Council of Ministers in April 1997, I see no reason why Ogubay never cared to include the theoretical framework of sustainable development that includes economic, social, and environmental analysis (see Desta, 1999).

Since sustainability is a 21^st Century agenda, Ogubay should have paid more attention to environmental sustainability his model to analyze the three case studies. For Example, as Ogubay suggests, cement is often used for building materials in Ethiopia. Moreover, Ogubay states that establishing big cement factories in Ethiopia has enabled it to save foreign exchanges. However, I am not sure why Ogubay fails to tell his readers that the cement industry in Ethiopia produces many emissions (dust, carbon dioxide CO2, nitrogen oxides (NOx) and sulphur dioxide (SO2), odor and nose (World Bank Group, 1998).

Also, we know that the production of leather products can harm the environment. As Desta, Tesay, Berhe, and Geregiher systematically reveal (2017), the leather industry in Tigrai, contributes to pollution, such as tannery dust, effluents, and sediments. It further induces negative externalities on the environment, workers in the tanneries, and the population that live downstream.

Finally, Ogubay should know by now that the Floriculture (horticulture) industry uses intensive resources, such as land, water, labor, and inputs, such as fertilizers and pesticides. The use of such resources in a concentrated space and time has the potential to harm the local environment. Moreover, Ogubay should have explored how the transport of horticulture produced for export, particularly by air transport, can damage the global environment (Winwright, Jordan, Day, 2014).

I would like to salute Ogubay for his case study. When I picked the book titled Industrialize Africa… and more particularly, when I read Ogubay’s article, “Ethiopia: Lessons from an Experiment,” I learned that Ethiopia’s incredible economic growth for the last fifteen years was rather based on incoherent governmental industry policies. Development does not mean just growth; it includes structural transformation or changes in the structure of the economy; therefore, if Ethiopia wishes to continue its economic growth, it must develop solid industrial policies that will promote sustainable and democratic development.” More specifically, As Stiglitz states, Ethiopia needs to move “towards a green economy, a learning society, and an innovation economy” (2017). In today’s world, it is no longer possible to design industries or plans for countries without mapping out the effects of the environment on development. Therefore, Ogubay’s analysis would be more innovative if it included the environmental impact of industrialization in Ethiopia’s.

References:

Africa Development Bank Group (Nov. 2017). Industrialize Africa: Strategies, Policies, Institutions, and Financing. Available at http://www.afdb.org/en/news-and-events/industrialize-africa-strategies-policies-institutions-and-financing-17570/ , accessed 12/7/2017.

Desta, A and Hadush Berhe. (2017). “Manufacturing of Eco-friendly Textiles: A Case Analysis of an Industrial Park in Makelle, Ethiopia.

Desta, A, Tesay, T. Berhe, H,. Geregiher, A. “ Analysis of Kaizen Implementation in Northern Ethiopia’s Manufacturing Industries” The International Journal of Business and Commerce. Vol. 3, No. 8, April, 2014.

Gaard, M. (July, 23 , 2016). “Afro-Pessimism Versus Afro-Optimism” The Blog about Africa-Your news source about Africa. Available at http://mathiasgaard.wordpress.com/2016/07/23/afro-pessimism-versus afro-optimism/ , accessed 12/7/2017.

Kofi, T. and Desta, A. (2008). The Saga of African Underdevelopment: A Viable Approach for Africa’s Sustainable Development in the 21^st Century. Trenton, NJ: African World Press.

Wainwright, et al (2014). “Environmental Impact of Production Horticulture. Horticulture: Plants for People and Places. Volume 1, Pp. 503-522.

World Bank Group (July 1998). “Cement Manufacturing: Pollution Prevention and Abatement” Handbook.