Why the Export of Manufactured Goods Declines

Despite the industrial transformation the Ethiopian government is developing as a launch pad for economic growth, the manufacturing industry sector is not doing as well as expected, lagging far behind in terms of competitiveness in the international market. This manifests itself in the reality that foreign currency generation from the manufacturing sector is trending down on pars of planned export targets. With the first phase of the Growth and Transformation Plan (GTP) already gone, export plans increased by an average of 50.6Pct, while performance remained at 19Pct. Even export-oriented sectors like leather, textile and garment have been registering low export performances vis-à-vis industry plans.
However, although not satisfactory, government capacity building and facilitation support – ranging from easing customs authorization to bench-marking and twinning arrangements –have enabled companies to increase productivity towards having more value-added and quality manufactured items.
Unfortunately, these efforts didn’t help the export market significantly.
So, what factors are contributing to such restraints in the export of manufacturing items? One can assume poor planning may be to blame. But most outstandingly, the following phenomena are to blame:

Experts in the developmental state narrative argue that for an intact industry sector to exist, infrastructure development should precede almost everything. Prior to the whole lot, roads must be built to connect critical market points within a country and the neighbouring regions; power shortages must be sorted out by providing priority rights to manufacturers – as well as to exporters. But to date, as cities and rural villages in the country are experiencing blackouts, industries are no exception.
In addition to this, the Ethiopian financial sector is not manufacturing–friendly. The corporate nature of banks is infertile to manufacturing investments. The financial industry should be restructured in such a manner that banks should be flexible enough to lend money to manufacturers – slotting in the very concept that unlike other forms of trading, manufacturing is not a quick profit-making enterprise.
Above all, one critical factor stands out in dragging back the manufacturing momentum: infrastructure development is taking the money. In fact, as a gross domestic product (GDP) share, Ethiopia’s spending on infrastructure is the highest in Africa. And for a foreseeable manufacturing sector, we need to have robust infrastructure development. But creating a fair balance in terms of distributing capital funds towards priority sectors is always intelligent.
Even so, that is not the reality on the ground: infrastructure development takes loans funds, sometimes emptying the government’s coffer. But private or public, manufacturing companies are desperately in need of huge loan to feed their research and development activities, increase productivity, finance expansion projects and for skill and manpower development.

In the early 1990s, the term glocalisation was invented by sceptics of globalization who claimed to witness that the world is getting more fragmented, not united. Their argument was that there is no globalization but regionalization or localization. And, according to the book World 3.0 by Pankaj Ghemawat (PhD), Professor of Management and Strategy at New York University, there are some statistics to substantiate the argument: world exports today are limited to around 30Pct and cross-border foreign direct investment is only 9Pct.
Today, this is also evidenced by the geopolitical showdown in Eastern Europe, the surge of radical Islam in the Middle East and Africa, the ascending of non-democratic economic superpower China, and the rise of self-serving emerging economies, which are all obviously threats to Western globalizers.
The bottom line: if there is so-called localization over globalization, it immensely impinges on global trade, FDI and tourism, affecting the manufacturing industry and, by extension, the export market.
Since the financial crisis of 2008, the USA, EU, China and Japan made more tariff increases and export restrictions to favour local processers. The USA, the second largest manufacturing economy of the world after China, revitalizes its manufacturing industry with a new concept of localnomics through revising its industrial policy.
In 2012, the Obama administration proposed new tax breaks, vigorous research and development spending and vocational training for the manufacturing sector. This has brought some international American firms back home. The paradigm shift was also felt in the poor regions of the world as well. In 2013, Sudan amplified its domestic tax by 50Pct, which immediately triggered huge export decline from Ethiopia.
Booming Ethiopian Local Market
The fact that the local marketing of manufactured items avoids customs and logistics holdups makes domestic markets for companies preferable compared to export. In fact, it helps local manufacturers get their money collected on the spot or a few weeks after sales, whereas if they were to export they may have to wait up to three months to get paid. For cash-strapped exporters, waiting this long to receive their bank transfer is a headache. In addition, product quality is compromised in the domestic market, giving relief to manufacturers with no certificates of good manufacturing practices. But most important is the rise of consumer spending in the local market.
The domestic market of leather and textile products is on the rise with the surge in the fashion industry. All drug formulations made locally are consumed locally, as the Ethiopian pharmaceuticals demand is increasing by 25Pct every year, while export of pharmaceuticals is almost non-existent. Export sales of alcohol and beverages are less than 1Pct of the total production, while the local consumption is skyrocketing. The metal industry is yet to register exports while the local demand is ascending.
So because of the oddities, could the idiosyncrasy in export ambition shift back to its deserving state of import substitution? Only time will tell.

3rd Year • August 16 – September 15 2015 • No. 30

Melkamsew Abate

is Lead Researcher at the Food, Beverage and Pharmaceutical Industry Development Institute. He can be reached at thesecondsky2020@gmail.com

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