Ethiopia: The Potential China of Africa

Published on 8th May 2018

The Growth and Transformation Plans Ethiopia designed to push its economy into lower middle income status by 2025 bear in them a transition from an agrarian economy to an industrial one. In line with that goal, the country has been striving to draw in foreign investment to boost the manufacturing and industrial sectors.

Those efforts seem to have bear fruit as Ethiopia has been ranked the seventh most attractive African country to investors by Africa Investment Index (AII) 2018. With a rapidly growing economy, a huge population of over hundred million, proximity to major international markets, conducive policy environment and a rapidly improving infrastructure, Ethiopia has increasingly become a favorable destination for FDI.

Numerous companies have relocated their manufacturing plants from neighboring countries and major manufacturing locations such as Turkey, India and China to Ethiopia over the past decade. European and American companies are also increasingly flocking to the rising investment magnet in East Africa. Internationally recognized apparel, textile and shoe brands have also established manufacturing plants in Ethiopia.

With an 8.5% rate of economic growth forecasted for the next year by the IMF, Ethiopia is expected to retake its position as the fastest growing economy in Africa. According to IMF figures, the country also had an average of 10% economic growth over the past dozen years. The sustained rapid economic growth complemented by strong performance in the coming years, gives Ethiopia a positive outlook going forward.

The challenge over the past three years has been the political unrest in different parts of the country. However, that also seems to have abated with the election of the new  Prime Minister Abiy Ahmed (Ph.D.). The popularity he receives and the sense of unity he has galvanized among the people seem to have convinced the Ethiopian people that he deserves their co-operation and support. Therefore, the political stability that has been the whole mark of the past quarter of a century is assumed to have been reinstated.

Such suitable conditions are expected to bolster Ethiopia’s stature as an investment hub considerably over the foreseeable future. However, there are those who take this potential to unchartered territory through claims that it might be the new China. In a recent report by CNN entitled “Ethiopia is now Africa’s fastest growing economy,” Vijaya Ramachandran, an economist at the American think tank Center for Global Development (CGD), attributes Ethiopia’s growth to governmental effort to boost industrial production and manufacturing. A report released by Ramachandran and three other academics argues that “Ethiopia can follow in China's footsteps, and become a destination for low-wage manufacturing jobs.”

The report by the group of economists categorizes African states into three in terms of their income levels. The first group consists of solidly middle-income countries. This group includes South Africa and Botswana, which are characterized by very high labor costs and capital intensive industries. The second group includes leading low and lower-middle lower-income African countries like Kenya, Tanzania and Senegal - coastal, relatively stable, and with a strong business sector. These countries have relatively costly labor compared to countries like Bangladesh. “The third group consists of countries at the very low end of the income spectrum, so poor that there are almost no real comparators.” The report cites the DRC, Ethiopia and, to a lesser degree, Malawi, as countries that appear to fit the bill.

The report dismisses the prospects of the DRC and Malawi as investment hubs as implausible citing the “governance failings” in these countries. It goes on to assert that Ethiopia is the ideal country with all the traits to become the new China in Africa. The report states: 

Though landlocked, it (Ethiopia) has been moving towards easing logistics constraints through road and rail connections; it also has good air connections. It benefits from a stable administration that sees the manufacturing as a central part of its growth strategy. It also benefits from generally low costs. As measured by Purchasing-Power Parity, the general level of prices in Ethiopia is below the level in India and comparable to that of in Bangladesh. The firm surveys also suggest comparable levels of labor costs and a similar WEF Global Competitiveness ranking despite its far lower income level. 

The report further cites a McKinsey Survey administered to Chief Procurement Officers of large apparel companies on which countries would become the top manufacturing destinations in the next five years. The result, it states, ranks Ethiopia as the seventh in the world and the first among African countries. With such lofty perceptions about the country by Chief Procurement Officers, the flow of FDI to Ethiopia should pick up even more momentum in the coming years.  

The report also states that higher labor prices and the reputational problem of poor working conditions in Asian industrial locations are deriving investors away from the region to other destinations such as Africa. The rising wages of workers and the general cost companies incur in China are also forcing companies to relocate to alternative destinations. In other countries, it is restrictive labor and business laws that are raised as constraints for more foreign direct investment.  

Ethiopia, on the other hand, offers lower labor wages and better working conditions than the countries with reputation for poor working conditions. The report states that some sources claim manufacturing working conditions in Ethiopia - though far from ideal - are better than in Bangladesh and Cambodia. In the International Trade Union Global Rights Index, goes on the report, Ethiopia fared better than Mexico and Malaysia. There have, however, been health and safety concerns in some instances. Although not vividly put, the report implies that there are no restrictive labor laws in Ethiopia, which is meant to show that companies have relatively bigger room to manipulate labor. These conditions need to be improved.  

The report concludes that though it is hard to project what the future will bring, it is safe to determine that Ethiopia is better positioned to embark on a manufacturing-led take off than other African countries. It, therefore, has the potential to become the China of Africa.

By Ewnetu Haile

Courtesy: Aiga Forum.

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