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«Tilman Altenburg Bonn 2010 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN 1860-0441 Altenburg, Tilman: Industrial policy in ...»

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It should be noted that, as in other low-income countries, availability of reliable data is a major problem in Ethiopia. One factor of particular importance for the purpose of this report is that some relevant information, e.g. on the governance structures and privileges of those firms that are indirectly controlled by political parties, is not systematically disclosed. Likewise, monitoring and evaluation of policies is hardly ever done. This analysis and assessment of policy processes and impacts therefore relies to a large extent on qualitative information gathered from expert interviews and grey literature, such as unpublished government and donor reports. Support from GTZ, particularly Sabine Becker, in accessing policymakers and other stakeholders has been extremely helpful. Moreover, the author is indebted to Kibre Moges from the Ethiopian Economic Policy Research Institute, Mulu Gebreeyesus from UNU-MERIT and Eiko Kauffmann from GTZ for valuable comments on an earlier draft.

The report consists of four parts. The first part provides an overview of historical, political and socio-economic preconditions of industrial policymaking in Ethiopia. Part 2 discusses the government’s industrial policy, looking at the underlying philosophy of industrial policymaking and the resulting strategies and assessing practical policy formulation and implementation. Part 3 illustrates the making of industrial policy in two economic subsectors, drawing lessons and exploring why the government pursues different approaches in the two cases. Part 4 then draws overall conclusions on industrial policy in Ethiopia.

1 Altenburg (2010).

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia 1 Initial conditions and challenges for industrial policy Socio-economic situation2 1.1 With its 80.7 million inhabitants, Ethiopia is the third most populous country in Africa, with a rapidly growing young population. It is one of the world’s least developed countries, ranking in place 180 out of 187 on the Human Development Index. Ethiopia’s GNI per capita is as low as US$ 280 (2008). In 2007, 39% of the population were estimated to live below the poverty line of US$ 1.25 a day (PPP) – a considerable improvement compared to the 61% reported in 1995. Lack of basic education is a big problem,3 but, again, the government is undertaking strong efforts to improve this situation. The percentage of the relevant age group that has completed primary education increased rapidly, from 22% in 2000 to 46% in 2007.

Ethiopia is still largely agrarian. 85% of the workforce is engaged in the rural economy, mostly in agriculture.4 Agriculture accounts for 43% of GDP (down from 50% in 2000).

Agriculture is dominated by smallholders, the majority cultivating less than 0.5 ha and producing mostly basic staples for the subsistence of their households. Farmers do not have property rights on the land they cultivate. While abolishing private land ownership was a measure to overcome the legacy of a highly polarising feudal system, it also constrains investments in agricultural productivity. Despite some geographical disadvantages – dependence on irregular rainfalls, increasing soil erosion, aridity in some regions and pervasive tropical diseases in others – many regions of Ethiopia do have substantial agricultural potential, with different climate zones and relatively good availability of water.

Agricultural productivity, however, is stagnating, and food security is a major concern.

Several million people are once again dependent on food aid.

Manufacturing has stagnated at about 5% of GDP over the last 20 years. The decreasing share of agriculture has been compensated for by a similar increase in services. Manufacturing industry is largely limited to simple agro-processing activities (sugar, grain milling, edible oil production, leather tanning) and production of basic consumer goods (beer, footwear, textiles and garment). Industries that might help accumulate technological capabilities and create dynamic inter-industry linkages – such as chemical, electrical and electronics, metal-processing and other engineering industries – are almost non-existent.

Likewise, production of agricultural inputs is insignificant. Overall, the technological level of firms is very low, even by regional standards; e.g. only 4% of firms use technology licensed from foreign companies, and likewise only 4% have ISO certification (compared to 12% in both cases in Sub-Saharan Africa) (World Bank / IFC 2006).

2 Unless otherwise indicated, data have been taken from World Bank country tables: http://ddpext.worldbank.org/ext/ddpreports/ViewSharedReport?&CF=1&REPORT_ID=9147&REQUEST_TYPE =VIEWADVANCED&HF=N&WSP=N, accessed 17 Dec. 2009.

3 The youth (15–24 years) literacy rate in the early 2000s was 62% for boys and 39% for girls (UNESCO, cited in: www.unicef.org/infobycountry/ethiopia_statistics.html#52), accessed 17 Dec. 2009.

4 It should be noted that a minor proportion of the rural population is engaged in non-agricultural activities such as cottage industries and petty trade.

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The main export products are agricultural. Coffee, oilseeds, khat, pulses, flowers, skins, meat and meat products account for about 80% of all exports, with coffee by far the most important item. Some high-value horticultural products have recently been picking up.

Manufacturing exports were as low as US$ 105 million in 2007, accounting for less than 10% of total exports. Basically all manufacturing exports are agriculture-based (clothing, canned and frozen meat, semi-processed hides, footwear, beverages, and oilcakes). On the import side, Ethiopia imports most capital goods and manufactured consumer goods, and the country is heavily dependent on fuel imports. In recent years, imports grew much faster than exports. Currently, exports finance less than 22% of imports (European Union 2009). Ethiopia therefore has a huge and rapidly growing current account deficit.

When Eritrea ratified its independence in 1993, Ethiopia became a land-locked country.

Although the port of Djibouti is not far off, and shipment through Djibouti is quite reliable, transport to the port is a significant cost factor. Adding to this is the administrative cost of trading across borders. In this regard, Ethiopia ranks particularly low (152 out of 181 countries) on the Doing Business Index (World Bank / IFC 2008).5 Since the end of the civil war and establishment of the current government in 1991, Ethiopia has shown steady progress. The economy recovered slowly during the 1990s. After a drought-related recession in 2002/03, economic growth took off, with an average of 11% during the subsequent five years. Per capita GDP increased from US$ 107 in 2003 to US$ 201 in 2007 (World Bank 2009). This growth has been fuelled by inflows of official development aid, including soft loans from China and India, by remittances from the diaspora, and by foreign direct investment (FDI). Furthermore, Ethiopia has recently benefited from a series of good harvests. As a result of development aid and other inflows, public investment – primarily in roads, dams, education, and health – has grown much faster than private investment. This has spurred employment growth, but also provoked a foreignexchange crisis.

Overvaluation of the birr has recently driven up inflation. It also undermines incentives for industrialisation, because it benefits imports of simple consumer goods and increases the price of exports. Inflation is now expected to come down, but the current account deficit remains a major concern. In 2009 foreign exchange reserves were down to five weeks of imports (European Union 2009), causing the government to ration foreign exchange, mainly for private investors, and to force coffee exporters to put their stocks on the market. Such interventions are likely to have a negative effect on future private investments.

1.2 Historical and political background Ethiopia has undergone profound political changes. The country is building on a rich and impressive history of cultural development. As the country (except for a short period of Italian occupation) has never been under colonial rule, it started relatively early to build sovereign national institutions. Already in 1909, Menelik appointed 9 ministers and started to build up a modern civil service (Taffesse 2008, 373). The Imperial phase, which ended 5 Several interviewed entrepreneurs complained that intermediary goods and spare parts often ‘get stuck’ in customs, and that reimbursement of VAT may take years.

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia when Emperor Haile Selassie was deposed in 1974, was characterised by a fairly effective administrative system, but it also relied on autocratic rule and a feudal land ownership system. Many rural families did not have access to land to secure their livelihoods.

In 1974 a communist military junta seized power. The Derg regime, named after the committee of military officers that ousted Haile Selassie, initiated 17 years of a centrally planned economy. All private enterprises were nationalised. Private land tenancy was abolished and usufruct rights granted to peasants. Small producers were in part resettled, forced into cooperatives and grouped in villages, with the aim of improving service provision and land use.

Mismanagement and the Derg’s violent rule created strong opposition. Separatist guerrilla movements, particularly in Eritrea and Tigray, embarked on a protracted civil war. Under these conditions, a prolonged drought during the mid-1980s led to unprecedented famine.

In 1991 the Derg was overthrown by a coalition of rebel forces from different regions and made up of ethnic groups, which formed the basis for the current government led by the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) under Prime Minister Meles Zenavi.

The new government launched reforms for reconciliation and reconstruction of the country. After two decades of drastically declining real per capita income (World Bank 2007a, 10), Ethiopia now returned to a phase of steady, but modest, income growth. Stabilisation was interrupted by the war with Eritrea in 1998−2000. Only since 2003 has economic growth taken off, posting an average of 11% per annum.

The EPRDF is strongly committed to egalitarian policies. This is reflected in its focus on rural development, control of land ownership, and its commitment to pro-poor spending.

64% of the government’s total budget is spent on sectors that are mainly pro-poor, such as education, health, agriculture, water, and roads (European Union 2009).

Also, the government encourages decentralisation. During the Imperial phase, the country was governed by a central government whose elite was mainly formed by Amharas. The EPRDF government, a coalition of different ethnic groups, established a federal system based on ethnic-based territorial units in 1991. The Constitution grants those units a considerable degree of autonomy and even provides for secession of any ethnic unit. Moreover, political parties are organised along ethnic lines, which enhances political representation at the central level (Habtu 2003). All major ethnic groups are represented in government, with Tigrinya people in many of the powerful positions.

The government adopted market-oriented economic reforms. Given the disastrous record of the Derg, the new government recognised the role of private enterprises as the engine of growth. The government privatised many state-owned firms, encouraged competition, and reduced government intervention in trade and factor markets. Ownership of land and strategic industries and services, however, remained with the state. In 2003 the government decided to apply for WTO membership and started negotiations. In the same year, a new competition law was enacted. As a result, the investment climate has significantly improved, as a comparison of the first (2001/02) and the most recent (2006/07) Investment Climate Survey reveals.

While the government enacted market-oriented reforms, it also allowed political parties to use endowment funds to invest in many lines of business (whereas direct participation of

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political parties is not allowed). When the war was over, these funds were among the first investors, benefiting from manifold opportunities for reconstruction as well as from certain privileges (see below). The EPRDF uses its influence on those enterprises to advance its industrialisation agenda.

Moreover, the government is not willing to cede control of what it considers to be key instruments for the implementation of its development strategy. It has retained its monopoly in telecommunications and is very hesitant with regard to financial sector reform. In the same vein, the new competition law endorses the principle of free competition, but at the same time sanctions the privileges of remaining state-owned and endowment-owned enterprises and exempts from competition many products and enterprises that are regarded as having “significant impact on development” (USAID 2007). As a result, the WTO accession process has not made any significant progress.6 Ethiopia has attracted little FDI, even by African standards (World Bank 2009, i), reflecting both the incipient level of market development and political restrictions in the country’s economic management.

Until 2005 economic modernisation and liberalisation were accompanied by advances in democratisation. General elections in 1995 and 2000 were won by considerable margin by the EPRDF, giving the party a large majority of seats in the national parliament (not least because major opposition groups boycotted the election). Following the 2005 elections, however, democratisation suffered a serious setback. According to the official results, the EPRDF won the elections, although by a considerably reduced margin. The result was contested by opposition parties, and the fact that the National Election Board delayed the publication of results for several months was interpreted as a manoeuvre to manipulate the outcome. Tensions escalated, and riots following the elections led to more than 100 people being killed and many thousand put in jail. The EPRDF remained in power and enacted several laws that restrict the political space of civil society organisations.

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