A review of Ethiopia's two decades of industrialization stride
By Seid Ahmed
Tigrai Onlne - June 18, 2014
Ethiopia is emerging as one of the most important investment destinations in the continent for the fast paced economic progress it has been experiencing, for the lucrative business opportunities it provides, and for its attractive investment incentives.
Last month, a report of a prominent international think-tank identified Ethiopia as the Emerging Textile and Clothing Industry center. The report noted:
Over recent years there has been an increasing amount of interest in Africa as a continent with immense resources and potential. Ethiopia in particular has been singled out as a land of growth and investment opportunity.
Expect to see "Made in Ethiopia” emerging more and more over the coming years
It was a few months ago that another global organization, the reputed US-based global intelligence firm, Stratfor, published that report listed Ethiopia as one of “the 16 countries best suited to succeed China as the world’s low-cost, export-oriented economy hub” in the coming decades.
Stratfor's report identified Ethiopia among “the Post-China 16” or “PC-16”. That is: “the 16 countries best suited to succeed China as the world’s low-cost, export-oriented economy hub”. Ethiopia and the rest 15 countries are, according to Stratfor, “strictly successors to China as low wage, underdeveloped countries with opportunities to grow their manufacturing sectors dramatically”.
These achievements are accidental rather results of clear strategy, enabling/conducive environment and committed leadership.
Indeed, as the recent African Transformation report underlined:
A centralized economic system that discouraged private sector growth and a prolonged civil war were the main causes of Ethiopia’s dismal growth in the 1980s and 1990s.
But growth has been impressive since 2000, powered not by the extraction of natural resources and higher commodity prices, but largely by government attention to economic transformation, a change in policy direction toward welcoming the private sector, support to agriculture and export promotion, rapid expansion in public investment that likely attracted private investment and capital inflows, and debt relief.
In fact, Ethiopia's Industrial manufacturing sector has been suffering from mismanagement, due to absence of clear sector-specific policy and as a result of the flawed general macro-economic directions since the 1950s.
Pre-1991
Researches indicate that modern manufacturing factories emerged in Ethiopia in 1920s (As of 1927 about 25 were set up mostly by foreigners). The sector started to get momentum in the 1950s (after brief disruption in the WWII period). The 1950s also marked by some attempts to design a comprehensive plan to promote the country’s industrial & economic development.
The imperial regime launched three successive development plans between 1958 and 1973. The implementation of the initiatives attracted foreign investors and boost the manufacturing sector.
However, by the end of the Imperial regime in 1974, the overall industrial base was weak; the manufacturing sector characterized by dual structure, the modern sector constituted few hundreds of factories employing no more than 60,000 people and was dominated by import substituting light industries and foreign ownership.
As the overall assessment conducted by UNIDO stated:
[During the Imperial era], generous tax incentives, high level of tariff protection and the provision of credit by Ethiopia banks on favorable terms encourage an inflow of foreign capital into the industrial sector. Most of these foreign owned enterprises were in the field of import-substitution. Food, beverages and textiles accounted for nearly 75 percent of MVA in 1965; industry was capital intensive and had few backward linkages into other sectors of the economy. Instead, it depended heavily on imported inputs”
The manufacturing sector deteriorated further during the Dergue regime - that is from 1974 to 1991.
No specific industrial policy per se had been designed until mid-1980s. At the same time, the regime nationalized most of the manufacturing enterprises and reorganized them under state corporations, while putting various restrictions on the private sector & market. Since entrepreneurial activities were sup-pressed and private medium and large enterprises nationalized, the manufacturing sector shrunk and the private sector virtually reduced into micro & small manufacturing activity.
Same as the Imperial era, the Derg regime aimed at building large scale industries through state corporations without engaging private sector and foreign investment.
The government’s preference for large-scale projects using modern capital intensive production strategies has make worse industry’s dependence on imported technology and handicapped the development of a domestic engineering capability. New large-scale capital-intensive projects have taken the higher up of the investment funds allocated to industry. Such projects are costly in terms of foreign exchange, both in the short –term as virtually all the machinery has to be imported and over the long-term owing to continued imports of spare-parts and intermediate goods and debt servicing obligation. Despite industry’s orientation towards the domestic market, it draws heavily on imports for inputs.
Since 1991:
After the downfall of the Derg regime the economic direction underwent fundamental change. The government adopted market-oriented economic reforms. Given the disastrous record of the Derg, the new government recognized the role of private enterprises as the engine of growth. The government privatized many state-owned firms, encouraged competition, and reduced government intervention in trade and factor markets. Ownership of land and strategic industries and services, however, remained with the state.
The first decade (1991- 99) marked by various reforms reversing the command economy. Based on the new economic policy, the government formulated a long-term economic development strategy Agriculture-Led-Industrialization (ADLI) which is geared towards the transformation of the backward economic structure. It is a two-pronged strategy, incorporating on one side the external sector (export-led part) and on the other the internal sector which shows the forward and the backward-linkages between agriculture and industry. In the connection, agriculture will supply commodities for exports, domestic food supply and industrial output; and expand market for domestic manufactures. The mining sector is expected to give an impetus to the development of the export sector.
The new government also implemented three phases of IMF/WB sponsored reform programs that supported the country's development strategy and economic reforms. Major gains have been made from the reform program, particularly as a result of liberalization, low inflation, fiscal discipline and low government borrowing, infrastructure improvement and the growth of the private sector.
Moreover, the government initiated a privatization program since 1995/96. Three hundred seventy five government-owned firms were identified for privatization as early as 1995/96, thus providing an entry point for foreign investors.
A full-fledged Industrial Development Strategy (IDS) was formulated in 2002/03. In line with the strategy, the government decided to apply for WTO membership and started negotiations. In the same year, a new competition law was enacted. As a result, the investment climate has significantly improved, as comparative of the Investment Climate Survey reveals.
The Industry Development Strategy of the country has put in place the principles that primarily focus on the promotion of agricultural-led industrialization, exported development, and expansion of labor intensive industries.
These principles are inter-dependent and inter-linked one with another. The strategy has also set the other principles that clearly stated the pivotal contribution of the private sector, the guidance role of the government, and the integrated and coordinated participation of the public at large in nurturing the strategy. The strategy aims at those industries which are primarily involved in the production of manufactured goods.
The Industrial Policy and Strategy and the growth trajectory
Indeed, at the time of the launch of the strategy Ethiopia was one of the few African countries that have formulated and implemented a full-fledged industrial policy. The government has shown extraordinary commitment & ownership as the strategy was concretized into action by various sub-sector strategies and by the successive development plans such as; Sustainable Development and Poverty Reduction Program (SDPRP) 2002/03-2004/05 and the Plan of Action for Sustainable Development and Eradication of Poverty (PASDEP) 2005/06 -2009/10 and The Growth and Transformation Plan (GTP) 2010/11-15/16.
The main components of the Industrial Policy and Strategy of Ethiopia can be summed up as: Restructuring, diversification and technological dynamism. The five main guiding principles or direction of the policy are: Private sector as the engine of growth, ADLI (Agricultural Development Led Industrialization); Export-led Industrialization; Focus on labor-intensive industrialization and the guiding role of the state.
One of the primary responsibilities of the government clearly pointed out in the Industrial Policy and Strategy is creating conducive environment for industrialization. That includes: Stable macro-economic environment, Development of conducive financial system; Reliable infrastructure provision; Trained manpower; Effective & efficient administrative/governance structure and Efficient judicial system.
In liner with this, the Industrial Policy and Strategy identified subsectors for Promotion: Textiles and garment industries; Meat, leather and leather products industries; Agro-processing industries; Construction industries; and Small and Micro Enterprises.
The accomplishments of the Industrial Policy and Strategy cannot be listed downed in this short review. But we can highlight the progress in terms of time and selected sector.
In the first four years after the adoption of the Industrial Policy and Strategy, the pace of the Industrialization was boosted at an historic rate. According to researchers, the Ethiopian economy experienced a real GDP growth rate of 11.7%, 12.6%, 11.6%, 11.5%, 11.8% and 11.8 percent in the five years from 2003/2004 to 2007/08. In that period, the industrial sector has maintained a steady 10 percent growth!
Taking an approximate population growth of around 2.7 percent per annum the rapid growth in real GDP also translates to a significant growth in per capita income reaching 8.3 percent in 2007/08 following the 8.7 percent average annual growth in the past four years. Agricultural per capita has declined from 14 percent in 2003/04 to 4 percent in 2007/08 while the non-agricultural per capita increased from 3 percent in 2003/04 to 11 percent in 2007/08.
As described above the Industrial sector has maintained a steady 10 percent growth since 2003/04. The growth has been largely dominated by the growth in Electricity and Water and Construction sectors in 2007/08. Large and medium scale industries follow with 8.3 percent growth, while small scale and handicrafts grew by a slight 4.7 percent. The sector reached production capacity worth about birr 20 billion birr.
At this juncture, I shall address one common misconception. Some politicians cite the growth of the service sector to make-up baseless claims of about the growth.
Indeed, the service sector registered an annual growth averaging 13 percent in that period. However, we shall note that the growth in distributive services depends on the growth of the agricultural and industrial sectors and the other services and hence is a reflection of the growth in these sectors.
As one report summed it up:
Agriculture remains important, but its contribution to output fell from 58% in 1980–81 to 46% in 2010–12. The share of services rose from 31% to 43%. Industry’s share in GDP was 10.5% in 2010–12 and manufacturing’s about 3.6%, about 90% of which is low technology.
Manufacturing value added per worker has increased since the 1990s, particularly in textiles. Policy reforms of the 1990s—reducing tariffs, eliminating export taxes, providing new investment incentives, and improving global market access—have encouraged restructuring in textiles and in light manufacturing, especially in leather and leather products (shoes).
Overall export growth is estimated at about 10% a year between 2000 and 2011 by volume.
However, the government of Ethiopia was not satisfied even with that level of achievement. Therefore, Ethiopia launched the 5-years Growth and Transformation Plan in 2011 with the aim of maintaining an average real GDP growth rate of at least 11% and to achieve the Millennium Development Goals.
The plan is meant to establish suitable conditions for sustain-able nation-building through a stable democratic and developmental state, and ensure the sustainability of growth within a stable macroeconomic framework. The aim is to build an economy with modern, productive, and technologically enhanced agricultural and industrial sectors that lead in the economy. To this end, the plan includes clear targets: for exports of flowers, coffee, meat, and vegetables in agriculture, and exports of sugar, textiles and garments, and leather and leather products in agro-based manufacturing.
The plan also targets pharmaceuticals and medical supplies—and metals and engineering. For pharmaceuticals and medical supplies the target by the end of the plan period is to raise the share of local production to 50% from less than 15%. For basic metals and engineering the target is to raise capacity use in the sector to 95%, raise per capita metal consumption to 35 kilograms from 12, and eventually have local production meet the demand for components and parts by key manufacturing sectors such as leather, textiles, cement, and agro processing.
The GTP also aims to build implementation capacity, including a Civil Service Reform Program as one of its pillars, to establish mechanisms to maximize the benefits of foreign aid in the areas of agriculture, food security, social services and physical infrastructure. As per the GTP, several programs are launched to address weakness in tax administration, especially in registration, collection, assessment, audit, and enforcement with stated targets of increasing taxes from 8% of GDP in 2010 to 16% by 2015 and in the tax financing of spending from 53% to 87%.
Let's take a quick look of the accomplishments in each of the subsectors that the Industrial Policy and Strategy identified as drivers of growth and its priorities for Promotion: Textiles and garment industries; Meat, leather and leather products industries; Agro-processing industries; Construction industries; and Small and Micro Enterprises.
(To be continued)