2 December 2012

Ethiopia: High Time for Institutionalised Import Solutions

Renowned economists, such as Milton Friedman, describe manufacturing as the wealth-producing sector of the economy and services as the wealth-consuming one. This is largely because manufacturing involves the transformation of mixes of several raw materials into finished consumer goods on large scale.

One of the unique features of manufacturing is that it requires a combination of several raw materials to produce a single product. For example, to produce a padlock, one has to use at least 12 parts that make the product final and marketable.

The importance of raw materials in the manufacturing industry is not only measured by its very sizes and numbers required at once but also its share in the total production cost, which, according to a latest World Bank report, is more than 70pc in the African context. Thus, raw materials are binding constraints that must be made available on sustained basis, in its best combination, quality and reasonable cost to ensure manufacturing is going as planned.

However, the realities in the broader African context, includingEthiopia, are far from what is right for the industry. Manufacturing inputs are 25pc to 30pc more expensive in Africa than inChina, and maybe it is more expensive inEthiopiathan the African average asEthiopia's logistic system is yet evolving from it inefficient past.

The Ethiopian manufacturing industry imports more than 60pc of its required raw materials. More than 50pc of the manufacturing companies complain that their first major problem for below-full capacity performance is short supply and poor quality of imported raw materials.

Individual importers have overwhelming information and technical constraints on prices and qualities of the imported raw materials. They also have limited negotiating power with the international suppliers and hence are enforced to pay more than the average competitive price.

An Ethiopian industrialist, who has been working in the sector for more than 40 years, described the inefficiency of raw materials importing process inEthiopiaas the most critical challenges facing the sector for decades. Importation usually takes more than 180 days from the date an order of purchase from foreign suppliers is made until the final product is produced and distributed.

The implications of such inefficiencies are unbearably significant on the performances of the manufacturing sector. It increased production costs, reduced productivity, wiped out theEthiopia's competitive advantage in the international market and slowed national industrialisation. A World Bank report on its light manufacturing in Africa has accurately stated the pre-conditions that needed to be fulfilled for Africa to be competitive in its manufacturing industry saying, "without the ability to acquire large volumes of diverse inputs at competitive prices, of consistent high quality, and on short notice, African-based firms cannot hope to achieve competitiveness in the international market".

One of the major pre-conditions for Ethiopian manufacturing sector to perform at it full capacity and become competitive at the international market is, then, ensuring sustained access to diversified, reliable and plentiful sources of quality industrial raw materials. The impact of short supply, poor quality and high unit prices on the imported raw materials is very significant in the Ethiopian context where over 70pc of the total industrial inputs are imported.

Sustained availability of even the smallest amounts of imported raw materials is equally important for manufacturing industries because the short supply or quality constraint in a single input may stuck the whole functions of a company.

The emerging and highly advanced countries faced the same challenges at their early stages of development but the way they approached their respective problems is very much different from each other. As a matter of fact, the methods applied by different countries, in different times, may not exactly fit toEthiopia's reality. But important lessons can be learned.

ChinaandVietnam, ranked as 26th and 69th in the international industrial performance index (CIP), respectively, has used two common strategies. They developed world class trade logistics to support imports of industrial inputs that cannot be competitively sourced domestically. And they provided supports to local industrial input industries to be competitive.

ButChinawent further on two major things. It established quasi-public institutions that facilitated the input-output market mainly at local levels, such as the Yiwu Commodity Market in the Zhejiang Provinces. It also provided institutionalised information and technical assistance on inputs, technology and suppliers to small and medium manufacturing firms.

Other more common approaches, with which several countries have tried to address the difficulties they faced with their manufacturing industries, include spatial industrial policies, such as the establishments of special economic zones (SEZ) and export processing zones (EPZ). However, empirical evidences and case studies show that the performance of spatial industrial policies is very much mixed.

It failed in some countries, while it succeeded in others. But the common base with these polices is that it require huge public investment including infrastructure facilities, which has a potential in distorting public budget allocation, increasing income disparities and creating negative environmental consequences as large part of the investment concentrates on specific locations. But in any circumstances, government-led institutional solutions were not substitutable to advance the manufacturing industry.

In contrast, institutional solutions such as the Incorporated Intermediary Import Service Solution (IIISS) could address the challenges that Ethiopian manufacturing industry is facing today. These solutions will create huge economies of scale, which cannot be created without the institutionalised public support systems, as there will be no incentives for private companies to take the step. The economics of scale and the direct participation of the government in the intermediary services will, in effect, increase the security and confidence of industrialists on the sustained availability, quality and prices of the imported raw materials and technology.

Increased and collective negotiating power that could be obtained through the solution reduce production cost, save foreign currency and address the information and technical constraints. An integrated and systematic setup of such kind will also ensure the sustained availability of the raw materials and technology, and increases the efficiency, productivity and capacities of firms.

Beyond that, the incorporated intermediary services will create wider spillover effects on the performance and functions of other economic systems such logistics and transport, customs and revenue collection, financial services. And it is exactly why it is high time to implement the institutionalised solutions.

 Belayneh Begajo is an Economist and Managing Director of Bizinfo Consultancy.

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