Bottom-Up Industrial Policy for Ethiopia

The current democratic movement that has engulfed Ethiopia must be supported by economic reforms and democratic system. The two are intimately connected: you can’t have one without the others. Democracy is the best form of government for economic progress. But if the economy is not improving, the flag-bearers of democracy among the populace will make U- Turn. The Ethiopian youth do not “eat democracy”; at the end of the day they need jobs, income, food and housing for themselves and their dependants. What can the Ethiopian government do to power economic growth? There are short and long-term solutions. In the short term, scholars recommend measures related to short run macro policies such as fiscal/monetary policy, helping markets work efficiently and raising/lowering interest rates can be implemented. In the long-run, they advise structural reforms related to the supply side of the economy, the institutional and regulatory framework in which economic actors and stakeholders operate to be employed.

The purpose of this article is to advise the government to consider a new approach that accelerates structural transformation and ways to create more and better jobs. Before proceeding to a performance assessment and judgment, it is essential to discuss the use of terms and my framework of understanding the problem. In this article, industrialization is defined as resource allocation from low productivity growth sectors to sectors with high productivity growth. The experiences of many countries show that there is no industrialization without industrial policy.

Although sector-specific, the term industrial policy means different things to different researchers and practitioners. In this article, industrial policy refers to the type of government selective intervention, choice of activities, instruments and measures aimed at promoting the manufacturing sector.

Industrial policymaking and modelling comprises players, objectives, processes and tools. At risk of simplification, I can say that there are three different theoretical approaches used to identify a winning or unsuccessful industrial policymaking and modelling. The first theory advocates free market roles in industrialization. The pro-market approach is based on neoliberal theories, which advocates the intensification and expansion of the market, “by increasing the number, frequency, repeatability, and formalization of transactions”. Since industrial policy is about “picking winners”, the free market-centre approach claims that government is ill-placed to assess chances of commercial success more effectively than the market.

Government intervention in “picking winners and saving losers” involves not only the risk of misjudgement (distorting competition); it also exposes the state to capture by the interests that benefit from its intervention.

The second theory emphasizes the significance of state intervention in the design and implementation of industrial policy. The argument in favour of a state-centred approach is based on the notion of market failures, whereby a competitive market system does not yield a socially efficient outcome.

The third theory is based on theories of local economic transformation and growth. The place-centred perspective tries to synthesise state and market approaches at the local level. The starting point of this approach is that the causes of industrial non-development lie at the regional and/or local level. Industrialization unfolds in space and produces space, and it can take place both in urban and rural areas in parallel. The context and role of different places should therefore be taken into account in industrial policy design and modelling. There is uneven spatial distribution of economic shortages, surplus labour and concentration of economic activities. State and market centered approaches are blind to this spatial heterogeneity, dependency, and uneven distribution.

Of the three alternative theories to industrial policy design and modelling, Ethiopia used the theoretical assumption and justification state intervention theory. At the global level there are different reasons for state intervention in industrialization: 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) or central command economy. State intervention to accelerate industrial production and investment, as in the case of Korea, Latin America or socialist countries is often referred by the term “state-led industrialization”. In all the example countries, the concept focuses on a significant expansion of the role of the state in the allocation of resources among sectors and appropriate choice of efficiency techniques.

In the case of Ethiopia, the motivation for state intervention was not related to market failure. Basically, the factor markets were missing for 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 a lack of public infrastructure to make exchange feasible. Governments intervened due to lack of or in the name of creating an enabling environment for industrialization.

State-led industrialization in Ethiopia has gone through different phases and priorities since the late 1950s. The industrial development policies can be split into four periods over the past six decades. The first period is between 1961 and 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 by creating an enabling environment for private sector involvement.

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’. Industrial activities were reserved exclusively for the state. There was a systematic restriction on private sector involvement in small-scale manufacturing activities.

The third phase of industrialization was started by EPRDF. In 1994 the government endorsed agriculture-led industrialization for the purposes of transforming smallholder agriculture and using their productivity and output as a base for industrialization. The policy of agriculture-led industrialization sought to leverage the country’s existing endowment structure. At that time, 87Pct of the population lived in rural areas and the country had natural resource endowments which can be exploited for industrialization. The idea was that the manufacturing sector should complement and follow the growth of the country’s dominant agricultural economy. However, the country could not seize its latent comparative advantage due to the fragmented and subsistence oriented nature of smallholder agriculture and the massive resources it required for transformation.

The fourth phase of industrialization began when the government development strategy started to show preference for export-led labour-intensive industrialization. The government aimed to add value to the raw materials it exported and planned manufacturing to take the lead in the economy. The focus was mainly on sectoral or targeted industrial policy, designed to improve the performance of particular industries. Among the favoured sub-sectors are textile and garment; the flower industry; meat and leather products; textile, and agro-processing industries such as sugar and sugar related industries.

60 Years to Nowhere: Performance Assessment
What have been the gains of state-led industrialization in Ethiopia? A country’s industrial performance can be assessed using a number of statistical indicators reflecting the level, growth and structure of industrial activities. There is extensive literature and data related to the performance of the sector. According to the World Bank, the manufacturing sector in Ethiopia is nascent despite 60 years of state intervention. This is visible when measured and compared in terms of its contribution to gross domestic product (GDP). Industry value added is on average only about 5Pct of the GDP in Ethiopia, compared to more than 20Pct in sub-Saharan Africa.

The change in the country’s industrial growth rate over different periods shows that the slight change that took place in the last 60 years is related mainly to ideological and political changes and external debt. Thus, industrial growth is not related to structural transformation. Industry is not a source of dynamism for the economy and has weak inter-sectoral and intra-sectoral linkages.

In a country like Ethiopia, where employment generation is one of the key policy issues, manufacturing sector has a multiplier effect of job creation. However, on the employment side, the total employment growth in Ethiopia is largely affected by the agriculture sector not by the manufacturing sector. Agriculture accounts for more than half of the total employment growth while services accounted for a quarter of aggregate employment. Manufacturing, on the other hand, play a very small role in employment growth. Wholesale and retail trade contributed more to employment growth than manufacturing over the past 60 years.

So the question is why 60 years of reform suggestions on regulation, input provision, linkage, productivity and infrastructure development did not bear fruit? In my commentary entitled ‘3D System Approach to Private Sector Development in Ethiopia’ published in EBR’s 55th edition, I argued that top-down government intervention, which was followed by the current as well as the previous governments, resulted mainly in the growth of the economy directed by the state (state and party owned businesses).

Industrialization is used as means for growth of state economy. According to the 3D system of accounting for GDP, the size of the economy controlled by the government has increased from 22Pct in 1992 to 39Pct in 2015. The size of this type economy increased at the expense of the market and the population economies (consisting mainly individuals, households and firms).

The experience of the last 60 years and 3D economic taxonomy approach convinced me to stop believing in the positive role of the state in promoting industrialization. There is path dependency, namely growth of the economy controlled by the state for the state. Policy recommendation and improvement suggestion matters; but it doesn’t if it is more of the same theoretical assumption and implementation approach.

Beyond More of Same: Bottom-up Industrial Policy
Bottom-up industrialization means the establishment, operation and agglomeration of light and small-scale manufacturing industries by market forces with the aggressive support of local governments at the district level. In Ethiopia there are 769 district governments responsible for education, health, agriculture extension, water supply and social sectors. Of these district governments, 671 are labelled as rural districts and 98 as urban districts or administrations. The districts vary in their local endowment structures, namely labour supply, natural resources (farm land, agricultural products and minerals), capital resources (both finance and human capital), types of economic shortages and activities. The idea of a bottom-up industrial policy is to make districts rely on domestic economic growth factors (entrepreneurial talent, independent technology and free capital accumulation) to drive industrialization. Domestic economic driving forces are cultivated by market oriented reforms and local institutional innovations.

Surplus labour cannot be absorbed without endogenous technical change and agglomeration. District governments do not wait for technology to progress through the acquisition of equipment and machines from abroad. Instead, they help firms and enterprises explore existing local comparative advantages and identify key local competencies. District governments focus on building industrial and technological capacities and take the responsibility to upgrade the local endowment structure to endogenize industrialization.

Bottom-up is not only hierarchical. It is a concept which refers to place (the question of where to industrialize and why there). The rationale for industrialization is not based on “one size fit all” as in the case of state-led industrialization. The analytical case and model for industrial policy differ from district to district. The bottom-up policy stresses local specific interventions that are necessary for exploiting the full potential of the local endowment structure. To upgrade the local endowment structure, to uncover opportunities and risks, the local government conducts feasibility studies. This study helps the local government to figure out which industries to support within the districts for the purpose of local economic transformation. Bottom-up industrial policy targets not sectors but firms, which do the trading.

In addition to feasibility studies, the bottom up policy focuses on the ways and means of establishing industrial parks in the so-called rural districts and formation of clusters for existing firms in urban districts. An industrial park is a delimited territory with technical and production infrastructure, where manufacturing production, service provision and technological development takes place for the purpose of transforming the local economy. Clusters are groups of inter-related industries starting from suppliers to end products that drive wealth creation in the district. Companies that start on their own will have a hard battle to fight and need to have huge investment to get the advantages provided by industrial parks and cluster.

Over and above the establishment of industrial parks and cluster promotion, the bottom-up industrial policy identifies instruments that promote systematic and harmonious relationships between local stakeholders (private sector, the local government, and the youth or part of the population that is growing rapidly). The formation of associations of local entrepreneurs, workers and youth helps to build relationships of trust and interdependence among stakeholders. Unexpected consequences of interventions can easily be understood and rectified through applying a systematic and networked relationship among local actors.

For a bottom up policy to work, it is necessary to get top-down support. Local economic transformation has to be integrated with national and regional development programs particularly in the areas of private sector and financial development. Privatization of rural land is necessary for agriculture specialization and creation of industrial linkages. The attempted state support for smallholder farmers has made agriculture productivity precarious and food security vulnerable. In the Ethiopian context, specialization in agriculture should be left to the market economy, but there should be a law and procedure on the power of local administration in enacting land ownership.

In addition to addressing the issues of land privatization, the central government has an important role in financial development. It is important to continue to scale up public investment in infrastructure by exploring new sources of finance including domestic and external private borrowing. The central government has to ensure domestic macro-economic and financial stability and sustainable public debt positions.

In order to help local efforts of economic transformation, the central government has to adopt a new law regarding the establishment of industrial parks at district levels. This law should specify legal and organizational frameworks for the creation and functioning of the industrial parks in the districts. The law, among others, should aim to provide tax and customs incentives for the manufacturing enterprises that occupy the district industrial parks.

Finally, the central government providing industrial park law and enabling environments is not enough for starting industrialization from scratch. For good local institutional and organizational performance, the central government has to design a program that builds the capacity of local governments particularly in the area of engineering skills. Industrial park feasibility studies, value chain analysis, “picking winners” among heterogeneous firms, choice of champion activities/products, deepening local linkages, fostering strategic collaboration between local public and private sector, and other principles related to effective industrial policy require programs of local capacity building and development. The central government has a role in building the bureaucracy capacity of the district governments.

10th Year • Dec 2021 • No. 102

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