15 June 2017

Ethiopia: Structural Change - Looking Beyond Economic Growth

Ethiopia aspires to attain structural change as a way forward to sustain its successive and rapid economic growth, but achieving it seems to be a complex task. The government has picked and been pursuing industrialization as an instrument to prompt structural change.

The experiences of many, particularly of East-Asian economies show that if economic growth has to last long and bring about overall socio-economic transformation, it has to be underpinned by industry-led fundamental structural change.

Ethiopia has been promoting agro-processing industries and establishing industrial parks, as the government believes, its policy of developing and transforming agriculture has laid the foundation for economic take-off. And it is indeed an inevitable, yet daunting path to take, as the industrialization objectives in many African countries were ineffective in the past.

According to Dr Belachewe Mekuria, Deputy Commissioner for Industrial Parks Sector at the Ethiopian Investment Commission, the growth of a manufacturing sector that does not have backward linkage may not be sustainable. "It is very important that we have a transformed agriculture that has better yield and productivity to support the manufacturing sector. And the government has been taking cautious measure in this regard," he said during a recently held African Transformation Forum organized by African Centre for Economic Transformation.

Ethiopia has three comparative advantages that can be used as springboard to industrialize. "We have potential to improve production capacity; we have comparatively cheap labour and energy supply, besides the incentives the government delivers to investors," Special Advisor to the Prime Minister, Dr. Arkebe Oqubay told The Ethiopian Herald on the same occasion. "We also have comparative advantage in market access both locally and globally."

"Ethiopia performs very well in certain measures, for instance in cheap electricity supply across the nine countries we looked at, mostly because of its hydro-power potential," said Neil Balchin, Research Fellow at International Economic Development Group, who was among presenters of a study on structural change across nine African countries.

Yet, the proper utilization of the comparative advantages by itself is also a big challenge and the country still faces challenges in improving labor productivity. "For instance in manufacturing labor productivity, it is amongst the lowest," he said. "But we have also seen that it is growing very fast in last three years."

Arkebe, who also authored the book Made in Africa: Industrial Policy in Ethiopia also added "Our manpower is new to the industry sector. Thus, it has to adapt quickly and work discipline has to improve rapidly.

We have to improve the quality of the training in the higher learning institutions."

Eyob Tekalign, economist by profession, is Director at Schuze Global Investment. He said there are many challenges to achieve structural change in Ethiopia. "The small base of manufacturing by itself is quite problematic. The private sector has been mainly operating on trading activities. I don't think the private sector grew out of workshops. That is also the way the economy is structured," he told The Ethiopian Herald.

The private sector's perception and attitude towards manufacturing and productive activities is also very critical. "We are not still competitive in terms of comparative and competitive advantages. Of course we can talk about cheap labour and land and so on, but we have not been able to accumulate capital and technological capabilities which are very critical factors for manufacturing transformation," he said.

The government has been exerting a lot of effort in encouraging manufacturing by giving incentive packages to investors engaged in priority sectors like, textile, leather and the likes. "But, what lacks is close consultation between the private sector and the government," Eyob added.

Some also criticize the incentive packages saying it has been abused. Hence there is a big risk in providing incentives but, according to Arkebe, the government gives incentives to get return out of it. "We believe the cornerstone is that incentives should be based on performance and have a spillover effect. Then the key challenge will be measuring it because there are many external factors that influence performance."

The best approach would be to focus on sector based incentives because they are easier to measure in addition to connecting them with linkage effects, he added.

One major challenge for the growth of domestic manufacturing is that the domestic private sector is more focused in the service sector and may not be willing to easily move to the manufacturing sector. "So, how we align the incentives to encourage domestic private sector towards productive sectors will be quite important in this regard," Arkebe said.

"For the international companies, the export targets and the issue of export disciplining will be quite important and we also believe, having the parks will help to effectively measure [the outcomes] and execute the incentives as well," he said.

The government has been following a proactive policy on key resources management to encourage manufacturing industries. "It is not like we want to use the land as source of income. The government is willing to provide land for investors in the manufacturing sector for free with zero cost," Belachewe said.

"We have made quick assessment in terms of why investors are coming to Ethiopia and most of them say it is not about the incentives. It is more about the strong institutions that have enabled to build confidence in the country," he said. "Of course, the effectiveness of incentives is something we have to always do, review and interrogate."

Though the industrial policies come about with good intentions and determinations, there are drawbacks in terms of contextualization, according to Eyob. "We have a very good industrial policy in place but I think, having a dynamic policy that understands the global and local reality and moves accordingly is the first critical step," he emphasized.

The global value chains make the capital and other requirements of entry into industry lower. In this system, most of the manufacturing is managed by few global firms where many manufacturers involve in producing finished products. "Manufacturing has been really outsourced and broken down into several pieces. Part of a product, probably could be made in different countries. I think understanding that global reality and seeing how we insert Ethiopia's manufacturing into that global value chain is also important," Eyob noted.

One of the significant measures the government is taking to expand industries is establishing specific manufacturing industrial parks, special economic, free and agro-industrial zones as well as export oriented and logistics parks. And they are believed to be engines of rapid industrialization that nurture manufacturing industries and attract both domestic and foreign investors, according to the Industrial Parks Corporation.

They avail serviced industrial land, pre-built sheds equipped with all-encompassing utilities and infrastructural facilities that fit international standards and Ethiopia's success in bringing about structural change will highly be determined by their success.

Yet, the factories outside of the parks face difficulties in getting quality power supply, customs clearance and access to finance as they are dispersed in many locations. A national export coordinating committee was established to regularly meet, and take measures on binding constraints.

"Despite all the support given, it will be quite difficult to give them an equal level of support. Because in the parks, we try to address the constrains from the very beginning and we put institutions in place. Once this process is matured, we will have to see how we can replicate it also outside the parks," Arekebe said.

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