Shortcut to Industrialisation?
The recent unveiling of the industrial park in Adama was just the latest in Ethiopia’s bid to open an industrial park in every region. The plan for industrial parks has always been to attract foreign investment into the country, and thereby start Ethiopia on the road towards industrialization, and eventually to middle-income status. However, many experts warn that the problem of industrializing the country reaches further than just providing a place with reliable electricity and infrastructure. In the face of nearly overwhelming optimism about industrial parks, some still have reservations.
In a bid to industrialize its economy, Ethiopia has embarked on the development of Industrial Parks (IPs) in recent years. The first phase of the Adama Industrial Park, which was inaugurated a couple of months ago, is a testament to the path the country has chosen.
The first 19 factory sheds of the Adama Industrial Park were constructed at a cost of ETB4.1 billion. When it is completed, it is expected to create jobs for 25,000 people and generate USD38 million annually from the exports of garments and apparel. Adama Industrial Park is the fifth state owned park operating in the country, joining Bole Lemi, Hawassa, Kombolcha and Mekelle industrial parks.
During the inaugural ceremony, Arkebe Oqubay (PhD), board chairman of the Industrial Parks Development Corporation (IPDC), which is behind the policy and developments of IPs, disclosed that Ethiopia will have 30 industrial parks by the end of 2019/20. Six of the industrial parks are expected to be finalized in the current fiscal year, according to Lelise Neme, the recently appointed CEO of IPDC. Starting in the current fiscal year, regional states are expected to copy the model of the federal government and develop their own industry zones, particularly medium IPs.
“The government took the responsibility to develop IPs to solve the problems of land supply and lack of infrastructure, like reliable electricity,” stated Mekonen Hailu, director of the Communications Directorate at the Ethiopian Investment Commission “Most of the IPs focus on light manufacturing like textiles and garments, which largely hire workforces who previously worked in the agriculture sector. But even for high-tech companies, there are easily trainable graduates from universities.”
Inevitable pressures ranging from alarming youth unemployment to shortages of hard currency have pushed Ethiopia to develop IPs in a short period of time. But in broader terms, IPs are also expected to improve the share of the manufacturing sector in the economy, which currently stands at less than five percent of the gross domestic product (GDP).
But this has given rise to as much concern as hope. “The government is building IPs financed by debts secured from multilateral organizations and bilateral partners,” explains Amin Abdella, an economist and Industry and Trade coordinator at Ethiopian Economics Association. “Yet they are being developed without conducting detailed feasibility studies or knowing their comparative advantages.”
Roughly estimated, around ETB100 billion is needed to finalize all the IPs, according to an official at IPDC, who wished to remain anonymous. The official added that some of the parks are under construction with high interest loans. However, Arkebe, the mastermind behind the mushrooming IPs across the country, believes otherwise. “IPs are the fastest and only solution to tackle youth unemployment and remedy the hard currency crunch.”
Bereket Simon, a former government official who served in various policy making positions, including as the head of the Policy Research Institute, believes the emphasis government is giving to IPs is exaggerated. “IPs are necessary but their contribution to industrialization is not decisive. However, the government considers them the alpha and omega of industrialization. You cannot bring industrialization because you develop many IPs,” he told EBR.
Bereket’s argument can be partially explained by the thus far low returns of the operational, and highly expensive IPs. Exports, which hovered around three billion dollars over the past six years, and soaring unemployment rates remain intact. “There is high staff turnover, low productivity and minimal export performance,” says the official at IPDC. “That is mainly due to low wages, absence of raw materials in the local market and a lack of hard currency.”
Tian Jiang, Chinese ambassador to Ethiopia, has similar concerns. “Industrialization is the only path towards growth. Yet industrialization in Ethiopia has been dragged back due to the absence of infrastructure and raw material. Developing industrial parks is just availing the infrastructure,” he said, recommending that Chinese investors become involved in human resource development in Ethiopia, as much as they are in infrastructure development.
Arkebe, who believes Ethiopia has a good growth momentum, does not deny that there are problems when it comes to IPs. “The five major bottlenecks IPs are facing are power outages, incapable management, lack of skilled manpower, poor customs and bank services, as well as poor technology transfer mechanisms. We must improve these quickly in order to benefit most from IPs.”
Amin argues that foreign direct investment (FDI) is coming to Ethiopia because of the push factors. “Investors are joining IPs because the growing wage rates in their home countries are pushing them to look for alternatives. Since labor costs are cheaper in Ethiopia, it is becoming an ideal place to invest and operate. But this will only continue as long as labor costs remain relatively low.”
Of course, many scholars stress that industrialization is only achievable, and continuous, if it is based on the country’s natural resource potential. One of them is Birhanu Gizaw (PhD), an industrial engineer with fifteen years’ experience in Germany, who now teaches at Addis Ababa University. “In Ethiopia, IPs are being developed without considering the basic principles. Best practices around the world show that IPs should be built near resources not the other way round.”
The experiences of Asian countries that followed the same path almost 50 years ago can shed light on the issue. On one hand, there are Northeast Asian countries, most notably Japan, South Korea, Taiwan and China, which mainly depend on local entrepreneurs and investors and worked by copying technologies until they reached middle income status, before developing their own technologies to achieve full scale industrialization and prosperity.
Southeast Asian countries such as Malaysia, Indonesia, Thailand and Philippines, on the other hand, started their march towards industrialization by emphasising attracting FDI. Since they lacked the technology, Southeast Asian countries preferred to rely mainly on foreign investors, who were expected to gradually pass knowledge and skills to locals.
Every industrialization effort undertaken by these countries was in accordance with the roles given to local or foreign investors in their respective economies. Since its vast population used to reside in rural areas, for instance, China followed a rural industrialization development strategy. So it supported the establishment of any factory near the farm gate where the resources necessary for the manufacturing sector were available. This included the development of IPs. On the other hand, countries such as Malaysia and Indonesia established IPs mainly in urban areas, which was convenient for foreign investors.
These two different industrialization strategies were decisive enough to determine the fate of these countries. While Japan, South Korea, Taiwan and China became highly industrialized nations with strong economies, Malaysia, Indonesia, Thailand and the Philippines showed only marginal growth leap with relatively weak industrial sectors.
Citing the difference between these strategies and their end results, Bereket argues that the pillar of industrialization for agrarian economies like Ethiopia is rural industrialization. “We export raw cereal, coffee, sesame. If we support the farmers to install small industries and add value to their products, that will gradually bring industrialization. They can serve both the local market and export market.”
The agricultural demand-led industrialization strategy, which Ethiopia introduced 15 years ago, states that the first target should be achieving agricultural productivity, supporting farmers to accumulate capital first, and then changing the capital into small industries where farmers would add value to their agricultural products. The next stage of the strategy is manufacturing agricultural and construction machineries, which can be used by the farmers. So it underlines the hand in hand growth of agriculture and industry. “However, due to the absence of government focus, industrialization extension and support for the farmer, the strategy could not achieve its target,” says Bereket.
Amin also believes that Ethiopia’s major problem in the industrialization effort is low agricultural productivity, which in turn, leads to limited availability of raw materials. “The country imports raw materials as well as middle and high level experts. In fact, in Ethiopia, IPs are only solving challenges related to access to land, tedious bureaucracy and lack of infrastructure.”
As a result, experts stress that developing IPs that are dependent on imported inputs is a zero sum strategy. “Most of the industrial parks Ethiopia is developing are dedicated to sectors for which the country has no available resources, so they still depend on imported inputs,” says Birhanu.
Despite the concerns, Mekonen still argues that the location of all IPs is selected based on the availability of resources, labor force and logistics. “Availability of labor in these regional towns is the major criteria used during location decision process.”
Bereket, who stated in his latest book that ‘Industrialization must rest on the domestic private sector and FDI is nomadic’, underlines that the alpha and omega of industrialization is fabrication. “Without reverse engineering and fabrication, industrializing is impossible. Yet Ethiopia is focusing on IPs as a means to industrialization. Even the Asian tigers, when they brought western FDI into their IPs in joint ventures with locals, had no confusion about the fact that they would not be industrialized nation by exporting garment and apparel.”
Indeed, Richard Nelson, who developed a model to explain the so-called ‘Asian miracle’ argues that the absorption of modern technologies in the form of reverse engineering and fabrication were critical ingredients of the Asian development process. In fact, many economists who contributed to the field of neoclassical growth theory regard it as a detrimental variable in order to meet the evolving conditions for industrialization.
For instance, when China chose an open economy path in the 1970s, its factories were virtually without research and development centers. So, both state-owned and private Chinese firms bought licensed or copied parts as generic modules and quickly started up new manufacturing businesses to quickly catch up on product design. The same goes for the rest of the Northeast Asian countries that achieved industrialization.
This is why those who are close to the subject stress that developing IPs cannot be a shortcut to industrialization. “Improving agricultural productivity and producing skilled manpower that can copy technologies are the main homework left for Ethiopia,” Bereket concludes.
7th Year • Nov.16 – Dec.15 2018 • No. 68