12 July 2014

Ethiopia: Investment and Investment! That Is the Story

Tesfachew Taffere is an Ethiopian national who leads (director) the United Nations Conference on Trade and Development (UNCTAD's) Division for Africa, Least Developed Countries and Special Programs since his appointment in October 2011.

prior to that he held the position of chief of the office of the secretary-general of the United Nations Conference on Trade and Development (UNCTAD) from September, as well as heading the organization's Strategy and Policy Coordination Unit and serving as its Spokesperson. He also worked as a researcher for the International Labor Office and a teaching fellow. Tesfachew is published on a wide range of topics, including investment and enterprise development, technology transfer, innovation, industrial policy, and terms of trade, and hold an MPhil and a DPhil in development economics from the Institute of Development Studies, University of Sussex, in UK. Last week Tesfachew was in town launching UNCTAD's Economic Development report 2014: Catalyzing Investment for Transformative Growth in Africa where trends of investment and growth in Africa is dealt with at length. Asrat Seyoum of The Reporter sat down with the director for an interview regarding what the report indicated about Ethiopia. Excerpts: The Reporter: Large-scale public investment, which is accused of overcrowding its private counterpart, has been quite unpopular in Ethiopia. Nevertheless, the importance of public sector investment in Africa/ Ethiopia has been the highlight of your report. hHow did you come up with it?

Tesfachew Taffere: Well, let me show you quickly where we are coming from. We didn't focus on the Ethiopia necessarily. Generally, we looked at the African countries. The private sector is still emerging or is at an embryonic stage of development around Africa. But, if one asks what their problems are, electricity, transport, bureaucratic institutions, and infrastructure would come out on top. The problem is who will invest on such areas? Some people may say ok, it can be a public-private partnership. Which private sector? Foreign-private sector players will not come and build the road unless there is a return coming from such projects. That is problem numbers one. If the history of any of the developed countries were studied, one will not find a country that has not taken advantage of heavy public investment initially. For instance, in countries like Germany, China and the like nine, ten and eleven percent of the GDP was invested in the infrastructure. We are convinced about that, and trying to share it. Now, the problem is that sometimes people confuse public ownership and public investments. These are two different things. We are not saying that the government should go and own factories like the old days; that has been a tried and failed practice. Unfortunately, roads, railways, electricity and so on are quite expensive to construct; they require long-term investment. Countries like India did it by having hundreds go into the rural areas training people on how to add value and improve delivery and or improve the yield, and irrigation. The public sector is well financed, and that is also another point that we are coming from. Now, Like many things, if there are public investments that are not well planned and are squeezing finance from the private sector, then it has implementation problems. Don't blame the tool when the implementation is lacking. For example, the Import Substitution strategy and the way it was implemented in Ethiopia in the sixties was wrong. Simply tariff was imposed to discourage imports, access to finance was very insufficient; enterprises, goods domestically were in a bad shape, and failed. The strategy is not bad but the way it was implemented was. Whether you like it or not, in our opinion, public investment is complementary to private investment because public investment has certain areas that private investment desperately needs to produce, to move goods, to innovate.

Coming to the specifics, can you comment on the implementation of 'this tool' (public investment vis-á-vis private investment) in Ethiopia? If you are comparing the country with itself, I can say without doubt that there have been two or three things. Number one is that the country has land. And number two is it knows the public investment strategy well, while number three, and more importantly, it is all integrated. A good example here is that you set up railway networks that rely on electricity and that needs energy. If you have energy, the railway network needs to have these three things. One is avoiding using other types of sources of energy. It is import because you are generating it locally. Secondly, you can sell it. Thirdly, it's integrated, meaning that what you do here is integrated to other things. And integration in transport hopefully encourages exports. Another example: What do countries do if they want to add foreign investment to garment and textile sectors? Many countries got foreign companies and say, by the way, we can grow cotton and we have good incentives please come here and invest. If the cotton is grown by small farmers and if you say there is land and set up your factory so what is going to happen? Can you say 'build your factory, the road connecting it, connect the electricity?' It is impossible. But what they are doing in Ethiopia is setting up export zones, they have the incentives, they have set up the institutes for training, that shows you there is a plan to grow via a more integrated approach. We will see whether it works or not but as an approach they are moving in the right direction.

You've pointed out in many African countries that there is a labor movement to unproductive services sector. In Ethiopia too the service sector is gaining a lot of labor and capital while the manufacturing and agriculture stood to lose in this respect. Do you see something wrong with this scenario?

If your service sector is dominated by low productivity, low pay and semi- informal types of activities, you can say that there is a problem. But the service sector can also be high-productivity, dynamic and the labor movement can be to sectors like Insurance or Tourism (with foreign exchange generating capacity) or to financial services which can bring about foreign trade links and competition. Then, it has a place for more employees. So the question should be where it (labor) is moving to? In fact, the service sector is very large in Africa, roughly falls on 42 percent of the GDP. But, most of it is non-tradable. There is a very important chance of employment. We are not saying that this is not growth; of course it is. Imagine young people coming from agriculture; where will they go? The thing is that they are moving to a sector in which they can earn something and keep going. It is not where you add value. That is our concern. If labor actually moves to the service sector, there is no reason to call it unproductive. The movement of labor itself is a result of productivity. Do you accept this?

No. The productivity depends on the productivity of the activity. If my output in agriculture is a certain amount and by moving to the service sector I could produce twice that, there could be an increase in my labor activity. But, if my survival in agriculture is subsistence and if I come to Addis and got to Mercato (the largest open market in capital Addis Ababa) and got a job, the only thing I would have is to get something every month and keep going. So, where is the improvement in my living? It must be an activity or a job that pays better. If I move from agriculture to textile, I definitely expect to get more pay. And then, somebody comes and tells me that I can produce bicycles. Obviously, I will get much higher. Wages should improve my life. My livelihood will be kept better from my productivity. The profit generated from the productivity improvement is shared: some of it goes to labor and some to taxes, and the other is observed by the capital. The higher the share going to capital, the lower is the pay to labor. By the way, in Bangladesh, the second largest garment exporter in the world, some four million people, mostly women, are employed. But, the sector offers very low wages despite the fact that the profit has been terrific; it makes the capitalists rich. But, the thing is, for example, that the service sector in Ethiopia is to some extent influenced by Ethiopian Airlines. That's a tradable service sector because they are competing internationally. That is different. Look at what is happening in China, by the way: service is becoming the big emphasis. What do they do? They chase manufacturing and expand it. A lot of the labor coming out of agriculture is moved into manufacturing. Realizing manufacturing needs services, because you not only produce goods but also needs to plan to transport. They are following the traditional route of development, from agriculture to manufacturing. But what's happening in Africa is that they are jumping from agriculture into services, non-tradable services. The pattern is a bit strange. At the end of the day, in Ethiopia, labor moves from agriculture to services though the latter is dominated by fragile and informal enterprises. The fact that productivity is even lower in the agriculture sector appears to be the only viable explanation. What is your take?

That is true. That is the only option. For example, let's say I am a young man who doesn't want to farm. So I have come to Addis. Since I have no skills to take formal job, I go to Mercato. My options are to be a shopkeeper or hustle around to make a living. Subsistence living in a city may pay me higher than agriculture, but in terms of inflation and other circumstances it may not be. It's a sector easy to enter into. Some observers, including some UN agencies, actually romanticize the informal sector as if that is a dynamic sector and full of entrepreneurs. I worry that most of them are living a tough life. I doubt many of them are born entrepreneurs. For example, take the shoeshine boys in the street. I'm sure the boy would have been better off had he attended schools. I think such perceptions are misguided. In fact, some think that it not necessary for economies to transition from agriculture to manufacture and then to service sector. They argue that the order is really that important. Do you agree?

It might be too much to expect. Some islands may find it okay not to observe the order. You know some have some twenty thousand, one hundred thousand people. So they might not have the skills to go to manufacturing and then to service. Moving to manufacturing based on local consumption alone would be a bit crazy. These countries may not need to produce very heavy machineries or very sophisticated materials such as airplanes, except small things they import for consumption. Look at Singapore. It's a small country; it is a city state. They had no gold, diamond or minerals. So they built a specialized capital market. But, many countries do have a sizable population and need to take the steps while transitioning. When you talk about manufacturing sector in Ethiopia, the issue of FDI flow to the sector and the potential of foreigners to dominate the sector in a few years' time is another debatable subject. What is your take on that?

I think it is very difficult unless you ensure capacity building to local manufacturers linking them with foreign companies. In my presentation, I pointed out that avoiding discriminating against local manufacturing firms is the key. But, at this particular point you don't know how the marketing works and do not have the links. For example, if retailers like H&M comes here. Apparently they plan to come in some form. What are they coming with? Capital, of course. But, more importantly, they will come with the link. They have an established link all across Europe; they have shops across Sweden and down to Spain. The difference is that once a company like H&M is here, you learn from them. In such a away, Chinese companies also have that link. One day these firms would say that they don't need to be here because there are local producers which compete on international level. Mauritius, in this regard, can be a good example. Originally, it was a sugarcane producing country. About 90 percent of their export was sugarcane. Then they started thinking about diversification. So, they decided to move into the garment industry. They recruited students from the university to get trained as designers and tailors. The foreigners came in for FDI and built the market links for them. The foreign companies showed the local ones how they do things. And believe me, if a retailer like H&M comes here, after ten years, they will realize that the local firms are better suited to supply them than importing items for their five thousand or so shops around the world from elsewhere. But, if you don't have that capacity to learn, don't bring the FDI because in that case locals can't meet that demand. Ethiopian export currently falls around 3 billion and it should increase when international firms are here. Which local investor has thousands of shops in Europe or elsewhere to do that time? Talking about the risk of FDL now is talking about the future. When these firms arrive here and local firms are not benefiting from the linkage to international market, then we can worry. Then, we can say that there is indeed a problem with FDI. You pointed out in your report that most of GDP growth in Africa, about 62 percent, is driven by local consumption and that this trend is uncomfortable for you. What is wrong if such growth persists in Africa? It seems to be working for the advanced nations?

Let's see China. Do you know why they are growing? They are growing because their growth is investment based growth. The Chinese and Asian consumption contribution to their growth is down to 20 percent across their growth periods. Most of it is investment. The Chinese have been saving more. So, the growth you have seen is driven by investment because the growth is export oriented. They grew in export. Now, they have to encourage their people to consume the local production. Otherwise who is going to buy what they are producing? But, in case of Africa what is happening from Angola to other resource rich nations is that whatever they export is raw materials. They have a lot of money and are now experiencing expansion in their middle class. This is consumption-based growth. That is why the service sector is expanding. You need shops, you need restaurants, massages, spas ... but the source is that you are exporting raw materials and using that money to expand your bureaucracy. And, that is not a good growth since the manufacturing looks to be stagnant. You can tell that growth is not driven by manufacturing while the service sector is expanding. China's story is completely different. The government-led growth was hugely export oriented in China. Investment and investment! In Africa It is driven by consumption, though it looks amazing. Perfumes are useless but cloths made here are useful. If you are still buying something imported and not produced here, is that a growth Africa needs? That is the story.


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