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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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When the current revolutionary government took office in 1991, it made a strong effort to improve the efficiency of the civil service. Although it took over a fairly inefficient public sector, it was at least able to build on a history of public administration. In 1994 the new government established a Task Force for Civil Service Reform which developed an ambitious and comprehensive Civil Service Reform Programme12. Implementation started in 1996. The reforms tackled the major issues required to design appropriate industrial policies, to improve implementation, and – very important – to create safeguards against political capture. Among other measures, a programme for results-based monitoring and evaluation was initiated; an employee appraisal system was introduced; tools to benchmark public sector performance were established; and instruments to increase transparency and accountability were introduced at the federal, regional, and local levels, including “external audit, parliamentary oversight, anti-corruption, and the development of the accounting and auditing profession … Innovative techniques for monitoring fiscal and output performance (were installed such as) expenditure or input tracking surveys, cost efficiency studies, service delivery report cards, anti-corruption and governance surveys.” (World Bank 2007b) Almost all government institutions are currently undergoing ‘Business Process Reengineering’ to assess and reform administrative routines (Taffesse 2008, 403). In 2001 the 12 See Taffesse (2008) for an overview and assessment.

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia Ministry of Capacity Building was created as a powerful new entity to oversee the manifold capacity building programmes at federal, regional, and local levels.

The Civil Service Reform Programme is extremely comprehensive, and implementation has not yet met the government’s high ambitions (Taffesse 2008, 408 ff.). This is hardly surprising, given the present budget and human resource constraints, and the fact that deep changes in mindsets are required if bureaucracies are to embrace the principle of a modern and efficient public sector. Moreover, the programme is not free from political interference. Recruitment and career development, according to several interviewees, depend strongly on affiliation with the ruling EPRDF party. It seems that the government, while fully aware of the need to enhance the efficiency of its civil service, still values political loyalty higher than merit. There is a general perception that party affiliation and loyalty have become even more important since the 2005 events.

Still, Ethiopia’s government has been more efficient in providing basic health and education services to the population than most governments of similarly poor countries. This also applies to services for enterprise development. 46% of firms have access to a line of credit or loans from financial institutions, compared to 22% on average in Sub-Saharan Africa. It takes 11 days for a standard firm to obtain an operating license in Ethiopia, while the regional average is 20 days (World Bank / IFC 2006). The World Bank ranks Ethiopia 37 (out of 100 maximum points) with regard to government effectiveness; this is a fairly low rank, but higher than most other countries at the same level of per capita GDP, and the Civil Service Reform Programme is likely to push Ethiopia further up in the ranking.

Even more importantly, corruption does not seem to be as pervasive as it is in many other poor countries. While the Corruption Perception Index ranks Ethiopia 126th out of 180 (which is rather low, but, again, better than most other countries at similar income levels), most other sources paint a more favourable picture. According to the World Bank’s 2006 Enterprise Survey, only 12% of firms state that public officials expect them to make informal payments to get things done, compared to 41% in the region of Sub-Saharan Africa. With regard to the allocation of donor money, the funds allocated to so-called Programme-Based Approaches (where donors financially support national programmes rather than implementing clearly confined bilateral activities) are monitored, and the results show that allocation follows transparent criteria, with no visible influence of favouritism.

Likewise, the fact that GTZ was assigned a US$ 250 million contract on building several universities is a clear sign of development orientation: Although endowment-owned enterprises are strongly engaged in the production of cement, construction materials, and services, GTZ is free to organise public tenders without any government interference in favour of state-owned or endowment-owned firms.13 Moreover, Ethiopia is a voluntary member of the Construction Sector Transparency Initiative, an international multistakeholder initiative designed to increase transparency and accountability in the construction sector.

The downside of the government’s focus on creating an efficient civil service is that independent entrepreneurship has never been encouraged. Successful entrepreneurs are not seen as important role models in Ethiopian society, and opportunities for advancement are 13 Interview Mr. Helming, GTZ, Addis Ababa, March 2009.

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more often sought in the public sector than in entrepreneurship. During the Imperial phase, private investment in import-substituting industries was encouraged, but no performance requirements were imposed on protected industries and little effort was made to develop technological capability and promote exports (Ethiopian Economic Association 2005, 63 f.). Hence the policy helped to advance industrialisation, but not competitive entrepreneurship. During the socialist dictatorship of the Derg, entrepreneurial activities were suppressed and private medium and large enterprises nationalised (ibid). Even in the revolutionary movement that overthrew the Derg regime, most factions had a Marxist formation.





Nevertheless, the incoming EPRDF-led government recognised the need for a market economy and adopted a pragmatic economic policy, supported by the USA and the international financial institutions. The role of the private sector as the driver of economic growth has been acknowledged, although the 2005 events revived mistrust between the government and independent Ethiopian entrepreneurs.

In industrial development, business membership organisations play an important role in representing the interests of private enterprises, bringing in perspectives on future development trajectories, and holding governments accountable for the performance of public services. In Ethiopia, however, these organisations are weak and do not represent overall private sector interests. According to one advisor, only an estimated 2% of all registered business are members. Although chambers and associations meet with the competent ministries – and even the Prime Minister – quite frequently, these meetings are rarely concerned with controversial issues. According to some participating firms, they serve as communication channels through which government officials propagate their decisions rather than as a platform to exchange views, solve immediate problems and jointly develop long-term strategies for industrial development. Membership organisations, dependent on government transfer payments, lost much of their independence after 2005. It should be noted, however, that even before the 2005 events, business membership organisations did not play an active role as change agents for industrialisation. The Ethiopian government has been the sole driver of the national modernisation agenda.

Several informants confirmed that certain leading business individuals do have direct access to policymakers, but this access is informal and restricted. Of course, high ranking party members engaged in endowment-owned firms as well as managers of SOEs enjoy privileged access.

2 Industrial policy: Ideology and practice

2.1 The Ethiopian government’s overall development perspective Ethiopia’s government recognises the need to support private sector development as the engine of economic growth and productivity enhancement, and it is clearly committed to advancing industrialisation and other high-value activities. The government describes itself as a revolutionary democracy and developmental government. It can in fact be characterized as “developmental” in the sense that its attitude and activities are strongly driven by the desire to lay the foundations for long-term economic development. Probably few developing countries show such a determined and credible commitment to German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia − industrial development, technical and vocational education and training (TVET) as well as science and development. Substantial investments have been made in new universities, expansion and reform of the TVET system, specialised institutions for sector-specific technology development, and a new Ministry for Science and Technology;

− pro-poor spending. There is a strong policy focus on improving education and health as well as rural infrastructure, microfinance, and to maintain land policies that protect the livelihoods of the poor;

− decentralisation of government power to the ethnic regions and the community (woreda) level.

The political elite in the ruling EPRDF is strongly influenced by the successful economic management of latecomer development in Korea and Taiwan. The Industrial Development Strategy, as well as instruction materials for EPRDF cadres and documents circulated by Prime Minister Meles Zenavi, stress the need to build on capitalist enterprises as the engine of growth. At the same time, a clear distinction is made between “rent-seeking” and “developmental” capitalists. Rent-seeking capitalists are those not exposed to competition, including those who accumulate wealth by controlling the state. EPRDF documents refer to Mobutu’s Zaire and to Nigeria as examples of countries exploited by rent-seekers.

“Developmental” capitalists, in contrast, are those who create value in a competitive environment. The government perceives itself as a developmental state that dries up opportunities for rent-seeking and actively fosters and supports developmental capitalists. According to the perception of the EPRDF, it is crucial for Ethiopia to reach a ‘point of no return’ when the old rent-seeking elite will have lost its economic basis and developmental capitalists will have gained hegemony. This explains the government’s firm will to avoid the return to power of conservative business groups, which, according to its interpretation, want to reinstall a rent-seeking economy.

It is important to note, however, that the concept of rent-seeking can be interpreted differently, and that this makes a huge difference with regard to policy. Rent-seeking refers to the extraction of uncompensated value from others without making any contribution to productivity. Rents may be obtained by gaining control of land and other pre-existing natural resources; by establishing a position in imperfect markets that allows a firm to set its prices above the equilibrium price without losing profits to competitors; or by lobbying for government regulations that reduce competition in favour of incumbents. Public choice theorists highlight the risks of governments regulating markets in a way that encourages rent-seeking behaviour by firms, e.g. to get privileged access to land or tariff protection.

To avoid this, they advocate free enterprise competition.

The Ethiopian government has a different understanding of the concept. While it stresses the need for greater competition in some cases, it falls back on increased government control and regulation in others. It maintains state ownership of land because it sees private land ownership as the main form of rent acquisition,14 and it grants lavish lease rights to those investors it considers to be “developmental” (e.g. flower farms). Moreover, it interThe concept of “land rents” is based on the observation that the value of land is largely due to public investments in infrastructure, rather than resulting from amelioration by the landowner. http://en.

wikipedia.org/wiki/Rent_seeking, accessed 8 Mar. 2010

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venes in distribution systems with the aim of cutting out middlemen (which are thought to abuse of oligopolistic market power), and it prohibits hoarding. Coffee producers and traders, for example, are obliged by law to sell their stocks within a certain period of time after the harvest. In April 2009, when the government faced foreign exchange constraints, it shut the warehouses of 94 coffee exporters and revoked their licenses, accusing them of hoarding, among them the largest exporters.

Papers written by the Prime Minister, EPRDF documents and the Industrial Development Strategy all refer to the lessons that Taiwan and Korea (and in some cases Japan) hold for Ethiopia’s development. These include: early focus on productivity growth in agriculture in order to accumulate capital, increase supply for agro-industries, and generate demand for manufactured goods; restriction on ownership of land; a nationalised banking system that has enabled governments to channel credit from rent-seeking to value-creating activities; incentives for export-orientation; ‘carrot and stick’ policies for enterprises, e.g. setting productivity and export targets; a focus on export-led industrialisation; and control of industries as a ‘cash cow’ to generate the financial means the ruling party needs to retain political hegemony.



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