«Tilman Altenburg Bonn 2010 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN 1860-0441 Altenburg, Tilman: Industrial policy in ...»
When it comes to modern industrial policy, governments formulate industrial policies in a participatory process that enables them to elicit information from private stakeholders in order to address specific market failures. This requires both close interaction with these stakeholders (‘embeddedness’) and independence in decision-making (‘autonomy’), in order to avoid serving the interests of particular lobbyists (Evans 1995). Moreover, modern industrial policy is designed as an open-ended process of experimentation or “selfdiscovery” (Hausmann / Rodrik 2003). Temporary incentives may be provided if they are necessary to trigger private sector responses that may generate positive externalities; but they should be phased out when there is evidence that the private sector does not respond as expected, or when market development takes off and generates sufficient response. In order to take these decisions, close monitoring and evaluation of policy performance is needed, and stakeholders should be invited to provide their feedback. Hence good industrial policies build on an evidence-based, participatory and transparent institutional learning process.
Especially the institutional reforms of the Civil Service Reform Programme are shifting 18 According to interviews at universities, there seem to be almost no company spin-offs from universities, reflecting a lack of interest in entrepreneurship among the Ethiopian elite.
19 In the construction industry, 40% of the volume of any one contract must be given to SMEs, but this regulation does not apply to other sectors.
20 See Altenburg et al. (2008) for an extensive overview of principles of modern industrial policy-making.
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia the industrial policy system in the right direction. Some agencies under public ministries have already been restructured in a way that makes them more flexible and responsive to the needs of the private sector. The Ethiopian Horticulture Development Agency, for example, was formerly a department of the Ministry of Agriculture and Rural Development, which made it difficult for the agency to react quickly and flexibly to the demands of the private sector. Now it has gained flexibility as an autonomous agency that reports directly to the president and is free to hire its staff independently. A similar example at the regional level is the Tigray Agricultural Marketing and Promotion Agency (TAMPA) in Mekele, which attracts investors very proactively and professionally and shows remarkable flexibility in responding to their needs.
To develop an open policy-learning system, however, Ethiopia still has a long way to go.
Although the government has designed quite flexible and appropriate policies for different challenges (see e.g. the different ‘policy styles’ used in the cases of the cut flower and the leather industries, Chapter 3), these decisions are taken within the confines of the government (or the ruling party) and are neither systematically evidence-based nor participatory nor transparent. This may be a reflection of the EPRDF’s dogma of insulating its institutions from rent-seeking interests. Moreover, especially the relationships between government, ruling party, state-owned enterprises and endowment-owned enterprises are quite opaque. Transparent procedures with regard to allocation of credits, land, and subsidies of different kinds are needed to create a level playing field for all companies and build trust among the public and the private sector.
Currently, resource allocation is sometimes done in a way that is not fully transparent to outsiders. For example, the government hand-picked 100 textile firms for a subsidised ISO certification programme, rather than inviting companies to apply on the basis of transparent predefined criteria. Also, Ethiopia does not encourage competition among service providers or take measures to encourage private service markets, e.g. training for service providers or use of voucher systems.
As shown above, business membership organisations are weak, represent only a certain faction of the business community and lack political independence. Moreover, there are few other open spaces for interaction with non-state actors. There are no independent policy think tanks that are asked to bring in their expertise when strategies and programmes are drafted. Moreover, the adoption of the Charities and Societies Proclamation in 2009 is expected to reduce the democratic space for civil society to participate in the policy dialogue. In sum, the government is only partly able to elicit information from the business sector and other social groups about the constraints that exist and the opportunities available.
Industrial policies in Ethiopia are not yet evaluated systematically and independently. No rigorous evaluations of core institutions and programmes are available. Although there are some reporting requirements, reports provide information on activities, rather than impacts, and are usually prepared by the implementing agencies themselves, rather than third parties. Monitoring and evaluation is increasingly built into some programmes (e.g. the TVET system), but the government has not yet taken steps towards fully independent third party evaluations or open stakeholder processes. E.g. it was reluctant to accept a social monitoring component in the donor-financed Protection of Basic Services programme.
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 21 Tilman Altenburg 3 Case studies Two case studies have been selected to exemplify challenges and opportunities for industrial policy in Ethiopia: the leather/leather products industry and the cut flower industry.
These two sub-sectors exemplify different patterns of public policymaking. While the leather and leather products industry can be regarded as a traditional branch, which the government intends to upgrade through proactive support from a range of dedicated public institutes, the cut flower industry emerged spontaneously, but was then supported by a responsive government that removed hurdles on request of the private industry and its association.
3.1 The leather and leather products industry
Ethiopia has a huge livestock population consisting of cattle, sheep and goats. Hides and skins are one of Ethiopia’s most important export products. Already in 1928, the country’s first tannery and shoe factory was established. The Derg banned exports of raw hides and skins, forcing tanneries to move up the value chain and to export semi-processed products.
These became Ethiopia’s main manufactured export product, accounting for 74% of all manufacturing exports in 2002 (Ethiopian Economic Association 2005, 24). Exports of semi-processed leather as well as finished leather products, such as shoes and bags, have grown steadily, reaching an annual average of US$ 83 million in the period 2004/5 to 2007/8 (ecbp 2009). Today the sector consists of 800 registered hides/skins traders and about 6,000 tanneries and leather goods factories (World Bank Group 2006). Until recently, foreign investment in leather tanning was not allowed, and only in the last two or three years has foreign investment in tanneries and footwear production got underway.
Manufacturing of footwear is a promising option to increase the value added of the leather industry, making use of Ethiopia’s low labour costs. The production of leather shoes on a handicraft basis has a long tradition in Ethiopia, but only a handful of modern factories have been established. In the early 2000s, the footwear industry suffered a serious crisis when Chinese imports of cheap synthetic shoes flooded the domestic market, driving many small-scale producers out of business. Larger enterprises, however, reacted to the challenge, importing modern machineries and improving the quality, design, and durability of shoes. Soon after the first wave of Chinese imports, consumers became aware of the low quality and durability of these synthetic products, returning to buy genuine leather shoes from domestic producers. Today mechanised factories are clearly competitive and growing, whereas small producers of low-quality shoes are still struggling to compete with Chinese imports.
In fiscal year 2004/2005, regular exports of leather footwear started with small batches delivered to Italy. Three years later, exports of footwear had increased to US$ 10 million.
Nine large mechanised enterprises dominated the footwear industry in 2009, most of them exporters. In the same year, the first major international investor, a German company, began work on a factory in Ethiopia. In addition, 30 medium-sized and about 600-700 small and micro enterprises are engaged in the production of footwear (ecbp 2009).
The leather and leather products sub-sector is one of the most promising manufacturing industries in Ethiopia. Due to its strong backward linkages with the rural economy, it has considerable potential for poverty reduction. To date it has created about 10,000 jobs in German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia the formal industry (ecbp 2009), plus a much greater number in informal handicraft and trading activities.
However, the industry faces serious problems, both in the processing stages and upstream in the production of raw materials.21 The problems start out with the low quality of hides and skins. Most cattle are not treated against ecto-parasites and diseases, and this leads to quality degradation of the hides. The common practices of branding, backyard slaughtering, as well as inappropriate storage and transport of hides and skins further reduce their quality. Due to their small size and losses, tanneries obtain no more than 22 ft2 from one cattle hide, compared to 40 ft2 in Europe and the Americas (ecbp 2009). Tanneries cause considerable environmental damage and are currently unable to comply with international environmental standards. Manufacturers of finished leather products are considerably less productive than international competitors. Diseconomies of scale and shipping costs add to their competitive disadvantage. As the industry has until recently not been exposed to international markets and has not built up design capabilities, producers have little understanding of fashion trends in international lead markets.
While the country’s large mechanised firms – both tanneries and footwear manufacturers – have made considerable progress in terms of cost and quality, the performance of micro and small-scale producers is much worse. Footwear producers are clustered spatially in a few regions22 – the Mercato area in Addis Ababa being the most prominent cluster.
Clustering has a number of potential advantages, as it may help firms to deepen their specialisation and benefit from collective efficiency through joint purchasing, marketing, or learning. A study on the Ethiopian footwear clusters, however, has found very little specialisation and cooperation among firms. Moreover, it has shown that there is very little subcontracting between large and small firms (van der Loop 2003, 32).
To become a major player in international markets and expand productive employment, Ethiopia’s leather and leather products industry thus needs to tackle the manifold problems at different stages of the value chain in a coordinated manner. The government, with considerable support from UNIDO, GTZ, and other international agencies, has taken up the challenge and engaged in a comprehensive upgrading programme. The leather and leather products industry has been defined as a priority sector in Ethiopia’s PASDEP and the Industrial Development Strategy. The government has worked out a specific five-year development programme for the industry (2006−2010).
Already in 1994, six state-owned enterprises formed the Ethiopian Leather Industries Association (ELIA), which today is an industry association with 43 members, including basically all large tanneries and leather product manufacturers. ELIA organises specialised trade fairs and exhibitions and helps to match export deals with foreign customers.
In 1998 the Ethiopian Leather and Leather Products Technology Institute (LLPTI) was established, with support from the Italian government. LLPTI is now the main service provider for tanneries and the leather processing industry. It provides consultancy and training in areas relevant to the industry, including factory management, marketing and 21 See ecbp (2009); UNIDO / MoTI (2005); van der Loop (2003).
22 According to UNIDO, three clusters exist in Addis Ababa and there is one in Mekele.
branding, effluent treatment, and laboratory testing of quality parameters. In 2009 a benchmarking programme was set up to work more systematically on productivity enhancement. LLPTI also offers standard training modules for the many hundreds of micro and small producers in the country. The Institute is expected to recover 25−30% of service costs from user fees.
To encourage exports, the National Export Development Committee, chaired by the Prime Minister, sets export and productivity targets. These are negotiated with large enterprises – both private and state-owned – on a case-by-case basis, and individual targets are agreed upon. Participating companies benefit from a range of government incentives – e.g. tax holidays for exporters and tax-free import of machinery – and support services. In 2004, the government offered land for an industrial zone. In it the military built semi-constructed plants, which were handed over free of charge to producers on the basis of business proposals (Redi 2009).