15 June 2017

Ethiopia: Go for the Comparative Advantage to Industrialize!

editorial

Eight years ago, an interesting Development Policy Review Debate on 'Should Industrial Policy in Developing Countries Conform to Comparative Advantage or Defy it?' was held between Justin Yifu Lin and Ha-Joon Chang, two highly prominent economists, the former, being Chief Economist and Senior Vice-President of the World Bank at the time.

Yifu Lin, gave emphasis to a state that facilitates the private sector's ability to exploit the country's areas of comparative advantage to achieve industrialization. On the other hand, Ha-Joon Chang believed that comparative advantage, while important, is no more than the baseline, and that a country needs to defy its comparative advantage in order to upgrade its industry. Though, they held a different stance on the debate, both favour government intervention to foster the development of the manufacturing sector.

The experiences of South-East Asian countries demonstrated that effective government intervention as catalyst to encourage the emergence of the private manufacturing sector. Adopting a developmental state model and by allowing domestic and foreign private manufacturing sector to be the main actors in making use of nation's comparative advantage, the Ethiopian government has been striving to prompt structural change, more or less the view of Yifu Lin.

Despite the successive growth for almost 15 years, the contribution of Ethiopia's industrial sector to the economy remains insignificant. In 2014-15, while the service sector accounted for 46 per cent of the GDP, agriculture contributed for about 38.8 per cent to the GDP, 90 per cent of the foreign currency earnings and 85 per cent of employment. Yet, industry contributed only 15.2 per cent to the GDP. Not as good as the manufacturing industry contributed only around 5 per cent.

With a view to fostering light manufacturing industries and make use of its comparative advantages (cheap labour and electricity, market access and raw material), Ethiopia has adopted an ambitious plan of developing state-of-the-art industrial parks.

Between 2016 and 2025, Industrial Parks Development Corporation (IPDC) will develop 100,000 hectares of land, for a total factory floor area of 20 million meter square.

The industrial parks are sector specific and made to be suitable for textile and apparel, leather and leather products, pharmaceuticals, agro-processing and the likes with the aim of coordinating production alone value chains. Three major outcomes are expected from the parks: Job creation, export increment and technology transfer.

Generally, the industrial parks are of two kinds. In the first category are large, medium and light scale industrial parks which are set up to facilitate transition to the industry-led economy. In the second category, there is Integrated Agro-Industrial Park (IAIP), which aims to transform the agriculture sector.

Lack of specialized industrial parks had failed Ethiopia to reach the targeted 15-fold increase in textile and leather exports to USD 1.5 billion during the First Growth and Transformation Plan (GTP I), according to Arekebe Equbay, special advisor to the Prime Minister.

During GTP II, the manufacturing sector must achieve annual growth of 24 per cent and increase its contribution to export revenues from the current 10 per cent to 25 per cent. Hence, while the industrial parks become operational, the country is targeting USD one billion of annual investment in industrial parks over the next decade to boost exports and make it Africa's top manufacturer.

After all, what matters most is not the construction of the industrial parks but that they become operational at the right time. And their success would be highly determined by the easy accessibility of infrastructure and logistics such as quality power supply, telecommunication and efficient transportation, removal of bureaucratic red-tape and supply of skilled manpower and the likes.

Hence, maximum level of coordination between the responsible government bodies is required to deliver what the firms or companies need inside the industrial parks. This is not only crucial for the success of both domestic and foreign companies, but also critically central to the overall ambition of industrializing Ethiopia.

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