«Tilman Altenburg Bonn 2010 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN 1860-0441 Altenburg, Tilman: Industrial policy in ...»
This has implications for industrial policy. Some personalities of the old industrial elite figured prominently in the political opposition before the 2005 elections and held leading positions in business membership organisations. Since the 2005 events, the government has shown increasing mistrust of parts of the private sector and taken action to align business membership organisations with the EPRDF government. It refused to extend the license for the Ethiopian Manufacturing Industries Association, and international donors were urged to stop supporting the organisation. A new leadership of the National Chamber of Commerce was installed. Today the Chamber is mainly seen as an instrument to disseminate government policies and mobilise support for them, rather than a politically neutral representation of business interests.
As a result, the current situation is characterised by mixed signals. On the one hand, the government has, since 1991, embarked on a credible agenda of market-based and socially inclusive industrial transformation. It has undertaken strong efforts to invest in social development, education, vocational training, and industrial development; on the other hand, 6 The US, Canada and the EU have tabled a long list of open questions regarding WTO accession. Although the Ethiopian government is working on the responses, observers do not expect a consensus in the near future.
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia its fear of losing political control and having to abandon the EPRDF’s project of industrial transformation has resulted in a more restrictive political environment.
1.3 Enterprise structure The vast majority of Ethiopia’s firms are micro and small. According to the 2003 survey of the Central Statistics Authority, 1.3 million persons were engaged in the micro enterprise manufacturing sector, 94.2% of whom were own-account workers. Only 98,000 persons were employed in “small” (larger than micro) manufacturing enterprises. The micro and small firms sector of the economy is mainly a sector of self-employment. 55% of the micro enterprises in manufacturing activities produced food and beverages, 23% textiles and garments. 85% of the businesses in the small scale manufacturing sector are grain mills.
Employment in informal micro enterprises is growing much faster than employment in the formal sector. Between 1999 and 2005, informal employment (defined as employment in firms with fewer than 5 employees) increased by 144% compared to only 16% in formal employment. By 2005, 71% of urban employment was in the informal sector (World Bank 2009). Thus formalised medium- and large-sized firms absorb only a very small share of the annual increase in the Ethiopian workforce, and the majority of new entrants to the labour market are forced to engage in own-account work.
The Federal Micro and Small Enterprise Development Agency and international development agencies confirm that micro and small firms rarely ever grow into a medium-sized segment, reflecting a lack of entrepreneurial and managerial capability. When micro entrepreneurs are successful, they often prefer to diversify into new activities rather than to develop and expand their respective core activity. It is not clear to what extent this is a strategy to remain below the radar of public authorities. Labour productivity is extremely low, even by the standards of Sub-Saharan Africa (ibid.).
As a result, medium-sized and large firms are barely developed. In 2002 Ethiopia had only 49 manufacturing enterprises with more than 500 workers, plus 225 small and mediumsized manufacturing firms which employed between 51 and 500 persons (Ethiopian Economic Association 2005, 26). Most industries are engaged in sugar processing, brewery, cement, publishing and printing, leather tanning, and textiles. Five groups of firms can be
distinguished according to their ownership structure:
1. Many large enterprises are still state-owned enterprises (SOEs) going back to the socialist Derg regime. The current government created the Ethiopian Privatisation Agency and privatised 287 SOEs between 1997 and January 2009 (MoTI 2009). The government wants to privatise many more firms, but the process so far has been slow, not least because privatisation has often been linked to restrictive conditions, e.g. that the new owners refrain from dismissing personnel. In 2006 the manufacturing sector was “still dominated by public enterprises that account for 72% of total manufacturing value added, 62% of gross value of production, employ 57% of the manufacturing workforce and account for 64% of wages and salaries” (European Union 2006). According to another source, the share of SOEs in the output of medium- to large-size German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 9 Tilman Altenburg manufacturers declined from 58% in 2000/2001 to 51% in 2004/05.7 As some of the larger SOEs are now going to be privatised, this share is likely to go further down.
Moreover, SOEs in most manufacturing activities are now exposed to competition from private firms. Their performance varies. While some are in serious trouble, others outperform their private competitors, partly because they are larger and less constrained by tax administration, customs and trade regulations, access to land, cost of finance, and corruption. The government seems determined to maintain state ownership of enterprises in strategic sectors such as telecommunications, civil aviation, railways, energy, mining, chemicals, insurance, and banking. In the financial sector, private domestic banks have been admitted alongside the still dominant state banks and are rapidly growing.8 Likewise in the insurance industry, there are now eight private enterprises competing with one state-owned insurance company.
2. The political parties, which are organised along ethnic lines, control large business groups, so-called endowment-owned firms. The ruling EPRDF and its member organisations stand out in this regard. Under the law on political organisation, political parties are not allowed to invest in business. To comply with this law, businesses are owned by endowment funds run by party members or close allies, or those persons hold company shares directly. The business group controlled by the EPRDF is said to be one of the largest conglomerates in Sub-Saharan Africa. Within this group, the Endowment Fund for Rehabilitation of Tigray (EFFORT) is the most powerful. It was established by the Tigray People’s Liberation Front in order to generate income for the families of ‘martyrs’ and to advance the industrialisation of Tigray. EFFORT is engaged in a large number of industries, including building materials, tannery, textiles, garments, pharmaceuticals, industrial engineering, mining, banking, insurance, trading, construction services, and livestock. Although EFFORT operates as a non-governmental public charity organisation, it has never been audited since its launch in the mid-1990s. There is no transparency with regard to management structure, or profits and losses. The companies run by the EPRDF are reported to have made extensive use of the credit facilities of the state-owned Commercial Bank of Ethiopia. Private competitors claim that heavily indebted EPRDF companies have been bailed out, and despite mismanagement in some of them, there have been no cases of foreclosure. Moreover, EPRDF-related companies are said to get preferential treatment with regard to government licenses, allocation of foreign exchange, and contracts with the Ministry of Defence. Given the discretionary character of many government policies, however, it is not possible to verify these allegations.9
3. One private investor of Ethiopian and Saudi-Arabian nationality, Sheik Mohammed Al Amoudi, alone owns many of the leading firms across all economic sectors. According to Forbes magazine, he is the 43rd richest person in the world and is said to have invested more than US$2 billion in Ethiopia (Forbes, 11 March, 2009). His investments in Ethiopia range from hotels, gold mines, glass, plastics, soft drinks, a priCentral Statistics Authority, cited in World Bank (2009).
8 Private banks accounted for 30 and 46 percent of total deposits and credits respectively in 2007, up from 13 and 35 percent in 2000/01 (Addis Ababa Chamber of Commerce 2008).
9 See e.g. several of the sources cited in Zerihun (2008).
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia vate airline, production and marketing of households furniture and office equipment, to food processing.
4. There is some foreign direct investment, mainly from the European Union, India, Israel, the United States, and Saudi-Arabia. FDI is concentrated in agricultural activities, including floriculture, horticulture, meat and, recently, biofuels (Weissleder 2009). In trade and services, foreign investors face considerable restrictions.
5. There are an increasing number of independent Ethiopian entrepreneurs. Among them, Ethiopians from the diaspora play a significant role, as many business people emigrated during the Derg and engaged in economic activities in their host countries, where some of them accumulated capital and learned about new international business opportunities. E.g. all tanneries and garment companies and the majority of shoe and textile companies are private Ethiopian enterprises. Overall, however, independent Ethiopian entrepreneurship is still weak, and entrepreneurs complain of unfair competition, alleging that state-owned, endowment-owned, and even foreign enterprises have better access to land, credit, foreign exchange and support services.10 Ethiopia does not host any major expatriate business community. Businesses are mainly owned by Ethiopians. This is quite unique in Sub-Saharan Africa, where European citizens from the former colonial powers, Indian or Arab minorities often play a dominant role in the private sector. The Ethiopian exception is due to the fact that the country has maintained its independence.
Productivity varies greatly among Ethiopian manufacturing firms (Gebreeyesus 2008;
World Bank 2009, 17 f.). At the same time, firm turnover is high, especially among micro and small firms. 60% of firms exit in the first three years after entry (Gebreeyesus 2008, 113).11 This reflects two phenomena. First, there is a big group of “necessity entrepreneurs” who start own-account activities for lack of employment alternatives and without any clear business idea. Among these necessity entrepreneurs, productivity tends to be far below the level of well-established medium-sized firms, failure rates are high, and owners frequently shift to other activities. Second, some firms are more constrained in their access to credit, land, and product markets than others. Independent Ethiopian entrepreneurs (and micro and small producers in particular) seem to be more constrained than state-owned, endowment-owned, and foreign firms, and this results in lower productivity.
Investment surveys reveal that SOEs and endowment-owned firms are far less affected by problems in the local business environment. While independent private firms identify the anti-competitive or informal practices of others as their leading constraint and mention tax administration, customs and trade regulations, access to land, cost of finance and corruption as relevant problems, both the state-owned and the endowment-owned firms rank these issues much lower (World Bank 2009, 50 f.).
10 This is confirmed by UNCTAD (2004); World Bank (2007a); and Zerihun (2008, 264).
11 Gebreeyesus (2008), in his econometric study, finds that this high turnover increases allocative efficiency, that is, productivity grows because more productive firms replace less productive ones. The World Bank (2009) states the opposite, e.g. that Ethiopia is inefficient in its allocation of resources across firms, as the most productive enterprises are not systematically increasing their market share at the expense of less productive ones. The World Bank blames policy factors that distort competition in favour of incumbent firms.
Overall, most modern firms are highly vertically integrated. Subcontracting is rare, and especially micro and small firms have almost no productive links with any of the abovementioned ownership groups. Large firms perform even simple service activities in-house, such as maintenance of green areas, transport and security. This also holds for agriculture.
The reasons for this are not totally clear, but low productivity and lack of reliability of micro and small firms seems to be the main problem. Moreover, key institutions that could help to “lubricate” market transactions are weak (e.g. regarding property rights protection and contract enforcement), which explains why firms are risk-averse and unwilling to engage with business partners (World Bank 2009). In agriculture, farmers have been reluctant to participate in collective activities since the Derg regime established large state farms and pressed farmers into cooperatives. Mention must be made here of a few recently established exceptions, where large firms have engaged with micro and small scale producers, e.g. new outgrower schemes in agriculture in Tigray.
1.4 State-business relations While the Imperial phase was characterised by autocratic rule and feudal land ownership patterns, it also laid the foundations for a comparatively strong bureaucracy. To work in public administration was regarded the best route to social ascendance. Hence the administration was – and still is – quite well respected in Ethiopia. Nation-building, including the formation of an independent civil service, started much earlier than in most other countries of Sub-Saharan Africa. The relationship between government and citizenry, however, was clearly top-down and authoritarian, with little regard paid to transparency and accountability. The communist Derg, while aiming to build an egalitarian society, reinforced the existing patterns of top-down government. Laws, however, were regularly by-passed by the Derg (Taffesse 2008, 374).