23 December 2012

Ethiopia: Manufacturing Hurdles Require New Solution

Manufacturing involves sets of machinery, plants and complex processes.

The involvement of technologies, with different degrees of complexities, in manufacturing is an intimidating phenomenon for the majority of investors in developing countries, like Ethiopia. Especially since the majority of the population has no or limited literacy towards such technologies.

The required skills to understand and operate such a wide range of technologies also requires many years of practical training, in producing a competent workforce to fill the literacy gaps in the populace.

Because of such complexities in technology and prevalent technical literacy gaps, most local businessmen are seen shying away from investing in the manufacturing sector. Instead, they prefer less risky and less productive sectors such as services. This could well be just a short-term challenge facing the country, but how can a country effectively address its short-term problems unless it looks to the long term?

The best and only choice is through the government. The government has all the necessary incentives, resources and capacity to take on the responsibility of activating change, for the good.

Technology transferring processes and technology information are public goods that cannot easily be acquired, without the direct involvement of the government. Individuals may have difficulty in measuring and understanding the full value of technical information, or they may not have sufficient incentives and markets to achieve it. Market-based solutions will not work for technology transfer. The process requires huge transaction costs, generates fewer benefits and creates high risks for individuals.

World Bank's Knowledge Economy Forum held inItaly, in 2008, suggests; trade, foreign direct investment (FDI) and Diaspora and other networks, as methods of exposing local entrepreneurs to technologies and technical information, in a way that will enhance the technology transfer process. That is only half of the story, however. The other half, and the most important part of the solution, is the local capacity in acquiring, absorbing and adopting available technologies, and instilling proactive government leadership and policies.

The need for pro-active government policies and leadership within manufacturing technologies is far more urgent today than any time before, inEthiopia. The country is seeking to transform its economy from an agriculture-led to an industry-led economy, in a bid to join middle income countries in the coming few years. The current conditions of the country's manufacturing sector are not strong enough to jump-start this process, without an institutionalised government support system, assisting with the acquisition of imported technologies and raw materials.

The technologies, embodied within the imported machineries and equipments, cannot be absorbed and diffused fast enough, without organised government leadership and support systems. Government-led institutions could easily facilitate the acquisition of the manufacturing technologies with both competitive prices and quality. At the same time, they could also facilitate the absorption, adoption and dissemination of the information in an organised manner, to the wider public.

Such institutionalised government support systems need to be incorporated with two major purposes in mind. One is to address the technical and market information constraints of investors, and the other, to reinforce the government's long-term policies of instituting an industry-led economy.

An incorporated institutional solution is like hitting three birds with one stone. Addressing information and technical constraints, increases the security and confidence of investors and shifts resources from less productive to more productive sectors.

It also increases the growth and share of the industry, and facilitates the transfer, absorption and diffusion of technology. The services of the corporation ought to be efficient, competitive and market-oriented, and seek to generate local revenue, save foreign currency, increase economic efficiency and create spillover effects to wider economic functions.

The involvement of a corporation in the importation of manufacturing technologies and raw materials needs to be limited to specific areas, where private importers are less competitive. Identification of credible suppliers in the international market is one of challenges that individuals cannot afford.

Identification and regular updating on databases, of international suppliers, on wide ranges of manufacturing technologies and raw materials, simplifies all other services of a manufacturing firm. Identification and updating of credible suppliers cannot be carried out by simple advertisement, as it is both technical and time consuming.

An incorporated solution, similar to the Ethiopian Commodity Exchange (ECX), could genuinely provide effective intermediary services between local investors and international suppliers of industrial goods. It would certainly be useful for the infant Ethiopian manufacturing sector, as is the case anywhere in the world.

In such a way, it is a sustainable solution for the wholesale problem, as it is also expected to generate its own revenue from services fees. Both local investors, engaged in the manufacturing sector, and international suppliers of industrial technologies and raw materials could be interested in the solution, as it provides them with an important market linkage.

All indications are that it is time for Ethiopia to strive towards an incorporated solution, in order to solve the complex set of challenges facing the Ethiopian manufacturing sector.

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