«Tilman Altenburg Bonn 2010 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN 1860-0441 Altenburg, Tilman: Industrial policy in ...»
These elements in fact are a powerful factor in shaping Ethiopia’s industrial policy. Japanese experts have been invited to advise the country on industrial policy, Koreans to draft its science and technology policy. Agricultural demand-led industrialisation is regarded as the starting point for industrial development (also in terms of ensuring political support by the country’s large rural populations): land remains in the hands of the state, as private land ownership is regarded as a principal source of rent-seeking; the financial sector is set to remain under government control;15 the Board of Directors of the Commercial Bank is appointed by the government, and the bank lends on the basis of “strategic” political criteria; export orientation is strongly encouraged; specific performance targets for major firms are set; and government control of economic sectors – e.g. telecommunications – is maintained as a source of revenue for the government. In 2003/04 the government received 13.5% of its total revenue from SOEs and government-owned property.16 As Asian experiences show, strategic policymaking of this kind, which defines sector-specific targets, differentiates between rent-seeking and developmental enterprises, and uses incentives to reward and penalise, may help to kick-start development processes if it is well managed. But it certainly creates new sources of rents and, consequently, incentives for illicit enrichment.
15 The three major banks that account for the bulk of financial transactions are state-owned.
16 Based on Central Bank data, cited in European Union (2006).
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia
2.2 Ethiopia’s industrial development strategy: A critical review Ethiopia’s development goals are laid down in the Plan for Accelerated and Sustained Development to End Poverty (PASDEP) and its industrialisation goals are set out in the Industrial Development Strategy. PASDEP is the country’s second poverty reduction strategy paper, drafted for the five-year period 2005/06-2009/10. It has a much more explicit focus on private sector development, competitiveness, and growth than its predecessor. The Industrial Development Strategy, which was approved in 2002, is regarded as the country’s first-ever comprehensive industrial development strategy. It recognises the need for deep institutional reforms of the national institutional system, which is characterised as non-transparent, bureaucratic, anti-democratic, etc. The Plan spells out how “developmental” enterprises are to be supported.
Subsequently, a number of tangible institutional changes have been implemented, including the establishment of new (or strengthening of existing) specialised capacity building and technology institutes for sub-sectors (leather and leather products, textile and apparel, sugar industry, metal, dairy and meat, horticulture), and the elaboration of a detailed sector strategy for the leather industry (Zerihun 2008, 258). Ambitious reforms have been initiated in complementary areas, e.g. to overhaul the TVET system. Likewise, the annual intake capacity of higher education has increased strongly to 48,053, bringing the total number of students in universities to over 180,000 in 2006/07 (MoTI 2009).
Overall, the plan reflects a quite clear strategic orientation and the government’s strong commitment to industrial development and structural change. It is more explicit than the respective plans of many other countries, which typically provide standard lists of desirable goals, without offering much practical guidance for policymakers. While many other low-income countries accept whatever private sector development component international donors offer, the Ethiopian government is unmistakably “in the driver’s seat” and negotiates with donors to ensure that their offer fits the overall strategy. Given the stability of the government, which has been in power since 1991, Ethiopia’s development can build on a long-term strategy.
The Industrial Development Plan mentions a few general principles – e.g. to recognise the role of the private sector as an engine of growth; the importance of state leadership to challenge and support developmental firms; and the need to build on both foreign and domestic investors. Furthermore, it specifies priority areas for selective interventions that favour certain sectors over others. What follows presents and critically analyses the main criteria for selective support.
1. The most prominent focus is on agricultural demand-led industrialisation (ADLI).
From an inclusive growth perspective, this focus is well chosen. At the moment, 85% of the workforce is rural, with the vast majority engaged in agriculture, and agriculture is hardly connected to manufacturing. Low productivity and income severely constrain rural demand for manufactured products, and only 5% of intermediate inputs demanded by agriculture are produced by the domestic manufacturing industry (Ethiopian Economic Association 2005, 7). The government is making strong efforts to invest in rural infrastructure, primary education and health, rural vocational training centres, increasing the area under irrigation, etc. Dedicated technology and training centres have been set up to support specific industries (e.g. sugar, meat and dairy, leather and leather products) and a number of value chain programmes are underway.
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 17 Tilman Altenburg While this strategy, focused on infrastructure and supply-side technical inputs, creates important preconditions for rural development, it has not yet yielded any significant results. Farming and livestock management systems are still mostly archaic, productivity gains are far from satisfactory, and the number of specialised farms producing high-value cash crops (such as cut flowers, fruits and vegetables) remains far too low to improve overall indicators. The underlying key problem is lack of private investment, which in turn is constrained by public land ownership and very small plot sizes. Given these conditions, few investors are willing to undertake major investments in irrigation, mechanisation and agro-industries.
Its profound dependence on agriculture makes Ethiopia particularly susceptible to the adverse effects of climate change. Less regular rainfall could exacerbate rural poverty and nationwide food shortages. Droughts and periodic intensive rain could further deteriorate soil conditions. Strengthening climate resilience through adaptation programmes should therefore be high on the government’s agenda. In fact, a National Adaptation Programme of Action was prepared in 2007, and the government is currently developing a national climate change strategy with assistance from the World Bank. To date, however, there is little progress in implementation, and climate mitigation and adaptation are not integrated in the PASDEP or the national strategy for industrial development.17
2. Priority for export sectors. Given the limited size of local markets and the need to generate foreign exchange, there is a clear focus on export industries. Export-led industrialisation is also one of the lessons the government has learnt from the successful development of Taiwan and Korea. Again, the main emphasis is on high-value agriculture (horticulture) and agro-processing industries (leather products). Export industries benefit from favourable land lease rates, soft loans, tax incentives, subsidies for participation in trade fairs and international missions, and other services. Differential interest rates are offered for different products, e.g. horticulture projects qualify for soft loans, whereas the production of pulses for export does not. Following an “East Asian” approach, export targets are agreed upon for individual firms. The case studies in Chapter 3 document political support for two exporting industries.
So far export promotion has had limited success. Between 2003/04 and 2007/08, the total exports of three priority sectors (leather, textiles, agro-processing) increased from US$ 72 to 168 million. Exports thus remain marginal. What is more, the export share of these three priority sectors actually decreased from 12 to 11% (MoTI 2009).
The policy bias in favour of exports has repeatedly been questioned. Critics argue that efficient import substitutions may have the same positive effects on the foreign exchange account; and, even more importantly, entry barriers may be much lower, as local entrepreneurs do not have to cope with international standards, economies of scale, and high transport costs involved in the export business. Then again, encouraging firms to export may have a number of advantages, especially in terms of technological learning. In fact, Bigsten and Gebreeyesus (2009) show that exporting firms in Ethiopia are generally more productive than non-exporters and increase their 17 See Ellis / Baker / Lemma (2009: 40 ff.).
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia productivity faster. While part of this is explained by self-selection, the authors also found strong evidence of “learning-by-exporting”. It can be assumed that experiences of exporters exposed to sophisticated international markets create a number of knowledge spillovers for the local economy. According to recent statements by the Prime Minister and the Ministry of Trade and Industry, equal treatment will be granted to efficient import-substituting industries in the future.
Last but not least, the birr is currently over-valued. Firm-level support for exporters is unlikely to yield major results as long as exports suffer from an unfavourable exchange rate. Devaluation would help to increase export competitiveness and to resolve the current foreign exchange crisis.
3. Labour-intensive industries are seen as more appropriate than capital-intensive industries due to Ethiopia’s factor endowment. The Industrial Development Strategy talks mainly of agro-processing and garments as potential candidates. However, the strategy paper recognises that low labour productivity seriously constrains export competitiveness. It states that while salaries are two to three times lower than they are in China, productivity is five to seven times lower. Taking Ethiopia’s conditions as a landlocked country into account, the prospects for attracting outsourced tasks in global value chains (typically garment assembly in export processing zones) are dim. What remains are activities that are resource-based and use cheap labour, such as the footwear industry.
4. Four specific economic sub-sectors are identified in the Industrial Development Strategy (textile and garment industry; meat and leather products industry; agro-processing industry; construction industry). All of them are agriculture-based and/or labour-intensive. Specialised institutes and/or training programmes have been created for each of the sectors.
5. Cottage and small-scale manufacturing enterprises deserve special attention. Small enterprises account for the lion’s share of non-farm employment in Ethiopia, but operate at very low productivity levels. The vast majority of cottage industries and small firms can be categorised as necessity entrepreneurship (as opposed to opportunity entrepreneurship), because they lack basic conditions for business success, e.g. an innovative and promising business idea, capital, as well as technical and managerial skills.
To work on one’s own account is mostly a second-best decision in the absence of formal employment opportunities. As it is virtually impossible in the medium term to expand productive formal employment in a way that would fully absorb the currently unemployed or unproductively employed workforce, there is an urgent need to increase productivity within the segment of micro and small enterprises. Government support is mainly channelled through the Federal Micro and Small Enterprises Development Agency (FeMSEDA) and the respective centres in the regions (ReMSEDAs). These provide entrepreneurial and vocational training (using appropriate technologies for printing, weaving, metalworking, carpet making, etc.) through regional TVET centres and are seeking to increase their outreach by using a train-the-trainers approach.
Critics, however, see the SME policy as a job creation scheme that may be useful to provide poor people a decent source of base income, but does little to nurture innovation- and growth-oriented entrepreneurship. To achieve the latter, more focus
should be given to new business models that create additional markets. Options that have not yet been exploited in Ethiopia include: rewarding innovative business concepts; encouraging graduates from universities and colleges to set up new firms and coaching them with the help of experienced business people;18 support programmes that help link micro and small firms to larger firms, as suppliers or franchisees; and public procurement cum training programmes to upgrade small firms.19 An approach of this kind would require closer collaboration between FeMSEDA/ReMSEDAs and those institutions that promote larger industries, such as the Ethiopian Investment Authority.
Much more can also be done to improve provision of business development services beyond the services provided through the TVET system. As the public system of FeMSEDA/ReMSEDAs is unable to reach out effectively to all small enterprises, additional channels of service delivery may be required. Business membership organisations may be encouraged to strengthen their service offer, and private service providers may be built up using a combination of supply-side and demand-side incentives, such as voucher systems (Amha / Ageba 2006).
2.3 Policy formulation and implementation in practice