Rethinking Industrial Policy in Ethiopia

Published on 6th February 2019

The tradition of ad hoc reasoning and top-down approach of promoting industrial development in Ethiopia is just like an airplane without wings. 35 years ago, Professor Eshetu Chole characterized the period of industrialization in Ethiopia as “Running to keep in the same Place.” Industrialization is slow, now as then. Currently the national debt of Ethiopia amounted to around 30 billion U.S. dollars, equivalent to 33.50 percent of the country’s Gross Domestic Product in 2017. Despite huge debt, we still find industrialization at the same lower level of productivity growth.

Industrial policy is defined as “any type of selective intervention or government policy that attempts to alter the structure of production toward sectors that are expected to offer better prospects for economic growth.” There are different reasons for use of industrial policy: to address market failure (European countries), to protect infant industry (post-independent African countries), import substitution (Latin American countries), export promotion (Korea and Japan), and public-sector driven economy of a central planning (socialist countries).

In the case of Ethiopia, the motivation for state intervention was not related to market failure (existence of well-functioning markets but with low welfare outcomes). Basically, the factor markets were missing most of the time. Exchange was stifled by subsistence households. Market-making institutions were less developed. Property rights were not clearly defined and there was lack of public infrastructure to make exchange feasible. Governments intervene in the name of creating an enabling environment for industrialization (ensure macroeconomic stability, development friendly financial sector, providing reliable infrastructure services, building efficient administration, etc.).

State-led industrialization in Ethiopia has gone through different phases and priorities since the late 1950s. The industrial development policies can be studied in four periods over the past six decades. The first is the period between 1961-1974, when industrial policy focused on the development of light consumer goods catering to the domestic market. During this period, the government played a central role in the industrial development through investment and creation of an enabling environment for private sector involvement. However, the industrial base was weak and industrialization was caught in a vicious cycle of low productivity.

The second period belonged to the military socialist government, 1974-1991. The military government nationalized most of the medium and large manufacturing enterprises and declared ‘a socialist economic policy’ (PMAC 1975). Industrial activities were reserved exclusively for the state, which owned and operated medium- and large-scale manufacturing activities. There was a systematic restriction on private sector involvement in small-scale manufacturing activities. The nationalization of major industries scared off foreign private investment. Private direct investment, according to the National Bank of Ethiopia, declined from 65 million birr in 1974 to 12 million in 1977. The state-owned enterprises were financially weak and survived on government subsidies. During the last years of the Dergue regime, there was a sharp decline in the Ethiopian economy, particularly in the manufacturing sector. The growth of the manufacturing value added started to fall in 1988 and reached −40 per cent in 1991.

The third phase of industrialization belonged to the early period of government change, liberalization, reforming and recovery of the economy by EPRDF. In 1994, the government endorsed an agriculture-led industrialization for the purpose of transforming smallholder agriculture and use it as base for industrialization. At that time, 87 percent of the population lived in rural areas. However, the country could not size its latent comparative advantage due to the fragmented and subsistence oriented nature of smallholder agriculture and the massive resource it requires for transformation.

The fourth phase of industrialization began when the government development strategy started to show preference to export-led labor-intensive industrialization. The government aims to add value to the raw materials it exports and plans manufacturing to take the lead in the economy. The focus is mainly on sectoral or targeted industrial policy, designed to improve the performance of particular industries. Among the favored sub-sectors are textile and garment; flower industry; meat and leather products; textile, and agro-processing industries (e.g. sugar and sugar related industries). The government has provided incentives and support to export firms and investors in these sub-sectors: favorable land lease rates, access to commercial credit, free imports of inputs, and generous tax breaks. Since recent years, the government has constructed a series of new industrial parks to provide facilities for exporters.

The export-led labor-intensive industrialization is facing a number of hurdles: quality and shortage skilled labor, power failure, water supply interruptions, poor custom and work permit procedures, shortage of local industrial inputs, underdeveloped agricultural sector, shortage of foreign currency, inflation in production costs, poor logistic services, poor co-ordination and communication problems among responsible government authorities, weak domestic backward and forward linkages, illegal transfer pricing, high cost of entry and exit from business, lack of production facilities, and political instability.

There is an extensive literature and data related to the performance of the manufacturing sector in Ethiopia. Studies show that the manufacturing sector remained at its infant stage for the last six decades despite number of policy initiatives and improvement suggestions. The question is why industrialization remained at the same lower level of productivity growth.

My view is that Ethiopia’s industrial policy has a design problem. Industrial policy-making and implementation is not based on systematic application of knowledge about policy means gained from experience and contextual dynamics. Industrial policy practices changed mainly as a result of  political consideration or ideological motivation, very much less as a result of evaluating the appropriateness of the methods and practices of a given complex macro context. Despite best policy suggestions, there were no varied efforts for self-improvement. If any, they were inconsistent, abrupt and ill-assorted collection of micro-based improvement suggestion superimposed when government changes.

In a country where industrialization starts from scratch and population growth doubles every twenty-five years, the traditional methods of solving industrial policy problems (top-down approach and linear analysis) lead to costly intervention exercises. National industrial policy rationale, practice and methods have to go beyond more of the same approach and assumption and practice of solving the problems. Design thinking is the alternative theory and practical approach to solve the problems of manufacturing growth and expansion in Ethiopia. For details on the concept, rules and procedures of design thinking industrial policy see National Industrial Policy by Design Thinking. Please share the idea of the research with people involved in policy-making (government, parliament, political parties and leaders).

By Tsegaye Tegenu (PhD)


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