Industrialization in Ethiopia: The Fundamental Missing Issues in the Debate

Industrialisation is a process of building up a country’s capacity to convert raw materials into new products. The process involves a growing complexity of production systems, reliance on others’ primary or secondary economic activities and an increase in output.

Some of today’s advanced countries planned their industrialisation policies earlier to ensure a well-planned development trajectory. In the case of Ethiopia, while the awareness about the need for industrialisation is traced back to the early 1960s, the design of a comprehensive industrial strategy with structural transformation in mind has come with the 2004 declaration of the Ethiopian Industrial Development Strategy Document. Though a favourable policy package to introduce and develop a modern economy was in place during the imperial regime, there was not any deliberately outlined and explicitly specified industrial policy to accelerate industrialisation. The 2004 Document was therefore better in that it put in place an articulated industrial development strategy for the first time.

Creation of Enabling Environment

The 2004 Document discusses the basic enabling environments to speed up industrialisation in Ethiopia. These are ensuring macroeconomic stability; the creation of a modern and development-friendly financial sector; availing reliable infrastructure services such as road, railway, air transport, telecommunication, electricity and water supply services; implement an effective human resource development agenda; building an efficient, transparent and accountable bureaucracy and system of governance; and the establishment of a sound efficient judiciary system. Without ensuring these enabling environments, the private sector cannot be the main driver of industrialisation in the country.

Creating an enabling environment is important for the accumulation of capital and skill during the change in the productive structure. However, in the Ethiopian context, fundamental issues related to inward and outward orientation of the industrialisation policy and the appropriateness of the organisational structure of industrialisation are missing.

Policy orientation and organisation forms affect the modelling and performance of industrialisation. The inward or outward orientation of the policy affects resource allocation in manufacturing. For instance, should priority be given to the establishment of consumer goods industries or the development of capital goods? Organisational structure affects the division of tasks and responsibilities between the federal government and regional states in undertaking industrialisation. The federal government can take the responsibility of establishing heavy industries such chemicals and metallurgy industries, while regional governments are advised to engage in the task of establishing light industries such as food processing and consumer goods.

Industrial Policy Orientation

What is the relevant industrialisation policy orientation during the initial phase when there is a resource transform from agriculture to mix of industry-service sectors? Should the Ethiopian government follow an inward-oriented industrialisation policy like Latin American countries or an outward-oriented policy like East Asian countries?

These two strategies are commonly known as Import Substitution Industrialisation and Export-Oriented Industrialisation, respectively. The underlying goal of Import Substitution Industrialisation is to reduce a country’s dependence on the importing of manufactured goods. This is achieved through complex policy measures: giving protection to domestic industries; imposing high import tariffs; restriction of import licensing; subsidising import-substituting industries; and providing them cheap raw materials and energy, tax benefits and overvaluing exchange rates.

The Export-Oriented Industrialisation policy uses measures that are perhaps opposite to Import Substitution Industrialisation. It encourages the exporting of goods for which the country has a comparative advantage. For instance, the 2004 Industrialisation Strategy dictates that the meat, textile and leather processing sub-sectors, which the government considers to have a comparative advantage, should penetrate the international markets. Export-Oriented Industrialisation opens domestic markets to foreign competition as well, reducing tariff barriers, and devaluating the national currency to encourage export.

Now the issue becomes which way should Ethiopia go moving forward, what are the contexts – and how does these relate to the country’s current industrial policy choice?

Between 1958 and 1992, the governments of Ethiopia followed the Import Substitution Industrialisation policy. The three successive five-year development plans (1958-1962, 1963-67 and 1969-74) of the imperial government emphasised a private sector-led import substitution policy, while the Ten Year Perspective Plan of the Dergue regime adopted state-led import substitution industrialisation. However, the country did not move substantially forward in its drive to industrialise.

The EPRDF’s rule marked a shift in the country’s policies. Initially it followed a neutral policy and since the early 2000s, it has opted for an Export-Oriented Industrial policy. This policy direction, though there are issues that need to be addressed, has led the country to double-digit industrial growth. In fact, the past five years of the Growth and Transformation Plan period have been a success, as the manufacturing sector grew at a rate higher than the growth of the overall economy. The growth rate has been huge because the country is at a low base of industrialisation. Therefore, whatever is achieved gives a leapfrog growth picture from the outset.

However, given the current dynamics of growth and development challenges in the country, the Import-Substitution Industrial policy would solve a considerable part of the development challenges the country encounters. I base my argument on the 1966 logic of cumulative causation and industrial evolution of Nicholas Kaldor and my own study on the effects of population pressure in Ethiopia.

Kaldor laid out a four-stage model of industrial development. The first stage is characterised by the emergence of a local consumer goods industry, which reduces dependence on imported consumer goods. The machinery and equipment needed to produce items of consumption are produced either in-house or imported. In the second stage, domestic production of consumer goods provides the basis for net exports of these goods. The third stage, which may occur simultaneously with the second, involves substitution of imported capital goods with locally made machinery and equipment. The fourth stage occurs when a country becomes a growing exporter of capital goods (heavy industries).

Ethiopia is currently at the first stage of the industrial evolution. In rural Ethiopia, population growth has increased the number of subsistence households and their consumption and input requirements. It has also increased the volume and growth rate of the labour force actively participating in rural labour market. Population pressure has created consumption and employment demand pressures in rural areas.

To create employment for the surplus labour and to supply the consumption requirements of the households, it is necessary to establish consumer goods industries. This means the country should replace manufactured products imported from other countries by products manufactured at home for reasons of balance of payment and sustained growth. There is a need for substantial protection of domestic manufacturing industries. In other words, at this stage the country should adopt an Import Substitution Industrialisation policy.

Structure of Industrialisation

An appropriate organisational structure is a prerequisite for the proper management of industrialisation. Enabling environmental factors focus more on procedural reforms; they do not address organisational structure, which is also a relevant element in the success of industrialisation. An organisational structure refers to a system by which industrialisation tasks and responsibilities are formally allocated among the federal and regional governments. There are two approaches in the design of organisational structure: centralisation or decentralisation.

In Ethiopia, industrialisation has for long been administered centrally. This type of administration is needed for the provision of a uniform policy throughout the country, to compensate for the lack of skill at lower levels of government, and to minimise corruption. However, industrial agglomeration and concentration may lead to a high concentration of industries in small urban areas. This could result in income disparity and poverty in many countries because economic opportunities will concentrate in the areas in which industries have agglomerated.

Ethiopia, which is now aspiring for rapid industrialisation, should learn from the experience of other countries to avoid the unintended consequences of industrialisation by following a decentralised industrial development approach.

Manufacturing industries have the capacity to absorb surplus labour in the rural areas, which increases due to population growth. Besides, as agriculture grows, it further releases labour.  A decentralised industrialisation strategy would help to provide employment for the surplus labour before it migrates to urban areas and put unnecessary pressure in cities in the provision of social service facilities and utilities.

Both the Import Substitution Industrialisation policy and Industrial Decentralisation favour countries like Ethiopia, since they reduce the pressure they encounter on foreign currency, which at this time is in critically low supply – and spreads the benefits of growth to more people throughout the country.

The Ethiopian government should therefore ensure geographic balance in developing infrastructural facilities. In addition to this, it should attempt to lure investors to locate their industries on the peripheries of the country or rural areas, including moving their industries from the centre through tax incentives, secondary city or growth pole, and supporting the sub regional development.

It is through these strategies that dispersion of industries to rural areas, sectoral linkages and economic distribution can be achieved. Countries that have managed this have realised broad-based development.

6th Year . December 2017 . No.56


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