Industrialization Policy Has to Go Beyond the Usual

I find the tradition of ad hoc reasoning and top-down approach of promoting industrial development in Ethiopia to be like an airplane without wings: it moves like a car but doesn’t fly. Almost 35 years ago, the late Eshetu Chole (Professor) characterized the industrialization effort in Ethiopia at a time as “Running to stay in the same place”. Four decades down the line, industrialization in the country remains as slow as it was then.

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 the use of industrial policy: to address market failure (European countries), to protect infant industries (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).
Governments intervene due to a lack of, or in the name of, creating an enabling environment for industrialization such as ensuring macroeconomic stability, a development friendly financial sector, providing reliable infrastructure services, and building efficient administration, among others.

In the case of Ethiopia, the motivation for state intervention was not related to market failure, which is characterized by the existence of well-functioning markets but 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 a lack of public infrastructure that made exchange feasible.

State-led industrialization in Ethiopia has gone through different phases and priorities since the late 1950s. The industrial development policies can be divided into four periods over the past six decades. The first is the period 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 industrial development through investment and by creating 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 was during the tenure of the military socialist government, 1974-1991. The military government nationalized most of the medium and large manufacturing enterprises and declared ‘a socialist economic policy’ in 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. As a result, private direct investment declined from ETB65 million in 1974 to ETB12 million in 1977, according to the National Bank of Ethiopia.

The state owned enterprises were also financially weak and survived on government subsidies. During the last years of the Dergue regime, there was a sharp decline in the economy, particularly in the manufacturing sector. The growth of the value addition of the manufacturing sector started to fall in 1988 and reached 40Pct in 1991.

The third phase of industrialization belonged to the early period of the change of government, liberalization, reforming and economic recovery by Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF). In 1994, the government endorsed agriculture-led industrialization for the purpose of transforming smallholder agriculture and using their productivity and output as a base for industrialization. The policy of agriculture-led industrialization seeks 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 could 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 preferences for export-led labor-intensive industrialization. The government aimed to add value to raw materials for export purposes and planned for 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 textiles and garments, the flower industry, meat and leather products, and agro-processing activities such as sugar and sugar related industries. The government provided incentives and supports to export firms and investors in these sub-sectors, including favorable land lease rates, access to commercial credit, free imports of inputs, and generous tax breaks. In recent years, the government has constructed a series of new industrial parks to provide facilities for such exporters.

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

There is an extensive literature or data related to the performance of the manufacturing sector in Ethiopia. Studies show that the manufacturing sector remained at its nascent stages for the last six decades, despite a number of policy initiatives and improvement suggestions. The question is, why has industrialization remained at the same low level of productivity?

My view is that Ethiopia’s industrial policy has a design problem. Industrial policy-making and implementation is not based on a systematic application of knowledge about policy means, gained from experience and contextual dynamics. Industrial policy practices change mainly as a result of political consideration or ideological motivation, instead of as a result of evaluating the appropriateness of the methods and practices of a given complex macro context. Despite best policy suggestions, there have been inconsistent, and abrupt efforts for self-improvement, if any. Those that were present were an ill-assorted collection of micro-based improvement suggestions that were changed when the government changes.

The industrial policy in Ethiopia is besieged by myriad approaches and process inconsistencies and irregularities due to a lack of clarity in industrial objectives. These policies, inconsistencies and irregularities include the following policy packages: import substitution policy, export-led industrialization, agricultural demand-led industrialization strategy, industrial incubator tools (foreign direct investment, cluster initiatives), innovation policy (horizontal), sectoral industrial policy (textile or leather), establishment of agro‐poles for agricultural value chains, policy that target narrowly defined industries, supporting sunset (large mature industries) versus sunrise industries (new firms and technologies), physical infrastructure (such as industrial parks, business incubators and individual factory buildings), among others.

The continuous layering of policy packages without reflecting on the effectiveness of earlier measures is an indication of a short-term trial-and-error approach. Each time when an ideological or political anomaly emerges, it is dealt with by an ad hoc action. Adjusting government intervention is not based on the idea of making industries more efficient (achieving more by spending less), and more effective (by increasing the percentage of added values). The modification of government intervention depends on the ground of ideological and political vicissitudes.

In a country where industrialization starts from scratch and in a context where population growth doubles every 25 years, the traditional methods of solving industrial policy problems (top-down approach and linear analysis) leads to costly intervention exercises. National industrial policy rationale, practice and methods have to go beyond the same approaches and assumptions and practices of solving problems.

I suggest the following design tools and procedures to solve the problems of manufacturing growth and expansion in Ethiopia. First, create local government and private sector partnerships in the establishment of manufacturing industries in every district of the country. To facilitate this, local governments should conduct feasibility studies to figure out which industries to support within the districts for the purpose of local economic transformation. The other important action that should be taken is establishing industrial parks in rural districts and forming clusters for existing firms in urban districts.

The formation of associations of local entrepreneurs, workers and youth to build relationships of trust and interdependence among stakeholders is also important. There is a need to specify the central government role in factor mobility, private sector development, diversifying the industrial structure, ensuring spatial balance, providing industrial park law and infrastructure, as well as the coordination of sector policies and financial development. Finally, establishing the National Industrial Policy Council, which houses the designers of the industrial policy, is essential to solving the problems of manufacturing growth and expansion in Ethiopia.

8th Year • Apr.16 – May.15 2019 • No. 73