The Reporter (Addis Ababa)

12 April 2014

Ethiopia: Stimulating Growth of Private Sector

Though it can play a significant role in spurring the economy, one can assert emphatically that the sector is under-performing, according to all indicators. This can be ascribed to a raft of reasons.

Although the private sector is internationally recognized as being the engine of growth, the Ethiopian private sector has still far to go before fulfilling its promise. Hence, the sector's fledgling attempt to stand securely on its two feet should be provided with a policy support by the government.

Ever since the Ethiopian government adopted the 5-year Growth and Transformation Plan (GTP) in 2010, the private sector is being encouraged to turn its face towards manufacturing. While the government's desire to see the private sector to take up industry sector in greater numbers is laudable, it will remain a pipedream unless it is backed up by concrete policy measures.

Presently a substantial portion of private sector actors is engaged in the commercial and service sectors. A recent study which assessed the implementation of the GTP in its first three years found that the service sector's contribution to Ethiopia's GDP outstrips that of agriculture and industry. It revealed that the share of the service sector's share stood at 45.2 percent with agriculture accounting for 42.9 percent and industry 12.4 percent. These figures clearly show that the quick and sizeable profit the service sector offers is enticing the business community to join the sector in droves.

If investors active in commerce and the service sector are to be lured to the manufacturing sector, it is imperative that an enabling policy framework exists. Unlike the service sector, the industrial sector not only is capital-intensive, but also does not offer a quick return on investment. Unless the necessary incentives are in terms of the availability of land, credit, infrastructures and other critical inputs, investors will remain wary of allocating their hard-earned money to set up manufacturing industries.

Conventional wisdom has it that it's industry and not the service sector that is instrumental in accelerating a country's growth. All the nations of the world which already have built or are building an industry-led economy have done so thanks to the policy of the government and the confidence this engenders. Building confidence is a critical matter as it may take decades for investors to realize profit on their investment. Let alone for a country like Ethiopia, which has a low industrial base, it is even tough for the industries of developed economies to turn in profit.

The manufacturing sector can bring about a transformative change only when the basic ingredients - a skilled workforce, technologically advanced machineries and a leadership which is up to the exacting demands of the times - are simultaneously in place.

Aside from these, a prompt line of credit, a readily available access to power, telecom and water services as well as efficient customs, transport, maritime and port services, among others, are vitally important if a manufacturing enterprise is to emerge competitive on the demanding international market. One of the major objectives of the GTP is to bring about a structural change within the Ethiopian economy and make it industry-led.

Towards this end availing a wide range of support to Ethiopian investors desiring to engage in the manufacturing sector is of inestimable value. It would be hard to blame investors who are reluctant to shift from the service sector, which guarantees a quick and wide profit margin, to industry without first making it possible for them to develop self-confidence through various policy incentives.

The government is well advised to bear in mind that it alone cannot bring about the structural change it envisions without the active participation of the private sector in manufacturing activities. Foreign investors will be tempted to eye this sector only when they ensure that the policy incentives introduced by the government are appealing and lends them self-confidence. And as far as local investors are concerned, the provision of policy incentives will not only help to bolster the country's economy but also allow them to create more wealth for themselves and the nation.

The goals set out by the GTP to generate substantial revenue from the export of textile and apparel, leather and leather products, pharmaceuticals, metals, chemicals, etc, need to take into consideration the contribution of local investors. The failure to achieve the target set for the manufacturing sector is primarily attributable to the negligible involvement of local investors in the sector. Therefore, it is incumbent upon the government to persuade the private sector to flock to manufacturing of its own volition.

Needless to say, the quality of private sector actors we wish to see join the manufacturing sector in quantity are not those who cut corners to make a quick profit. Rather, the type we have in mind are those who are law-abiding types, abreast of global industry trends as well as committed to producing products that meet quality standards and enable them to be competitive on the international market. such forces of change and growth very much need policy incentives and support!

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