30 December 2017

Ethiopia: In Better Quality Products Lies Robust Manufacturing Sector

editorial

Just shy of half a decade since the Second World War that ended with a decisive mushroom cloud over the cities of Hiroshima and Nagasaki, Japan was in tatters when William Edwards Deming, statistician and management consultant, found it. A man that would best be remembered in the country for his work with its industrialists, his most notable contribution was to the field of quality management.

He stressed four points in one of his lectures. They were the "design of products", "uniform product quality", "product testing in the workplace and in research centres" and "sales through global markets", all of which he emphasised are critical for long-term profitability. Subsequently, the country that would within decades become the third wealthiest nation in the world created an award in his name - The Deming Prize. It gave recognition to individuals that made contributions to the field of Total Quality Management (TQM).

All of this transpired before most of the first generation of the Revolutionary Democrats were born, let alone made it to public office, and structural economic transformation became a key policy initiative of an Ethiopian government. For them, a shift from agriculture, long a backbone of the economy, to industry, even if Deming's teachings do not factor in as much, could not happen faster.

The venture is indeed ambitious. Agriculture accounts for close to three-quarters of the Ethiopian adult population's employment and still has the largest share of the gross domestic product (GDP), behind service. But with the average farm size smaller than two hectares - most being smallholder farmers who grow subsistence crops - it has left little room for growth. It has meant an over-dependence on few commodities for trade such as coffee, oil seeds and edible vegetables, which together account for 60pc of exports.

It does not help either that these commodities are susceptible to global economic shocks. Low commodity prices as has been the case the past three years have given way to revenues from the export of goods that stagnated under three billion dollars.

More alarming has been food insecurity, where food items are yet another burden to the already blotted import bill. And with only the most recent wheat import of 400,000tns standing at 2.1 billion Br, it is unsurprising that the first and second editions of the Growth & Transformation Plan (GTP) envisioned a better economy led by the industry sector.

And here, the Revolutionary Democrats have something to celebrate. Having shown a growth of 18.7pc in the past fiscal year, to account for over a quarter of the share of GDP, industry is the fastest growing sector. It stands a little over 10 percentage points behind agriculture.

In the same token, the manufacturing subsector has grown by 10pc annually for the past decade. Of the total investments that became operational during the fourth quarter of the past fiscal year, 30.5pc were in manufacturing, only second to construction. An indication of its economic significance, it nonetheless created 53pc of all the permanent employment as a result of the investments, which is almost twice of the construction subsector.

Celebrations though should come in short supply. The consumer market leaves much to be desired in rewarding quality products over those that are cheap. A consumer market tilted against products with better standards but with a higher price tag has been one of the headaches of manufacturers in Ethiopia.

The Global Competitiveness Report, published by the World Economic Forum, for instance, ranks Ethiopia in the goods market efficiency, an index which considers customer orientation and buyer sophistication, 124th out of 137 economies in the world. It shows a goods market that is inefficient.

Another one of the indices is innovation, which emphasises research and development and finds the country at 86th. While the quality of scientific research institutions does not fare better, Ethiopia performs rather well when it comes to firm's expenditure on research and development and their collaboration with universities, ranking 68th and 47th, respectively.

It has not helped that outside the consumer market manufacturers get the small end of the stick with another critical customer, the government. If there is a recurring character in many of the country's high profile corruption cases, it is the public procurement process. In the latest corruption probe into public officials that began in July, where over 150 individuals were taken into custody, officials from government bodies such as the Ministry of Finance & Economic Cooperation (MoFEC) and the city's Savings & Housing Development Enterprises were accused of running afoul of the procurement law.

In the face of all of this, there is little a manufacturer with better quality products can do to thrive. Ensuring that they do get a fair playing ground thus is a job for a government that should step up its efforts in nurturing the manufacturing sector. For this to happen, the government should not fall to the level of distorting what already fails to amount to a free-market economy. The focus should instead be to ensure that manufactured goods meet standards, mostly through encouragement.

Tax breaks for businesses that have a proven track record when it comes to research and development are a place to start. An excellent means of gauging this would be to determine whether or not manufacturers meet the voluntary standards set by the Ethiopian Standards Agency (ESA). Another would be to assess the type of relationship, if any at all, manufacturers have with higher learning institutions.

Parameters such as these, aside from serving as yet another check on the quality of their products, can be used to reward firms for their troubles. It would help them compete in the market price-wise without too much damage to their profit margins.

This though would not be of much help if the government fails to enforce already existing laws. Innovativeness could, for instance, be fostered through a robust protection of intellectual property rights. Despite the allegation that this would constrain secondary innovators, which to some extent is true, it would have long-term benefits in promoting technical progress. It would encourage manufacturers to innovate more by guarding against lower-priced similar products and freeloaders.

Implementation should also complement the continuous revision and addition to the Agency's catalogue of standards of products. If public procurement agencies continue to fail to recognise them, it will open wiggle room for corruption, or at least allegations of it, and kills the competitive spirit.

It is like Deming said, "If the product quality is too high, or too low, it would not be right."

It is not right now for products lie on the low side. And although the statistician was speaking to industry leaders, almost 70 years ago, it is as relevant an advice to the Ethiopian government today. Most businesses sync with the market, for it is impossible to survive otherwise. Then making sure that the market leads them in the right direction, where consumers are the ultimate beneficiary, is a job for a government that dreams of higher productivity.

As if a circle that feeds itself, such a market will mean manufacturers that strive towards better quality management. It will mean less cost as a result of an economical use of raw materials and reduction of wastes. Production levels would subsequently increase as would the uniformity to the quality of products that customers could depend on. At the end of this road will be export diversification, not to mention less import of goods.

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