The Manufacturing Industry: Challenges and Prospects
By: Mulugeta Gudeta
The manufacturing industry in Ethiopia does not have a long history, dating back only to the 1950’s and 1960’s. Although local manufacturing industries were established in Ethiopia earlier than most sub-Saharan African countries, their growth was stunted by many factors such as erroneous government policies, or deliberate attempts to discourage private sector development as it was the case under the military administration when the state sector almost entirely dominated the economy in general and manufacturing industry in particular.
In the 1950’s and 1960’s the Imperial government had initiated a relatively encouraging process of laying the basis for the manufacturing sector. This process was however short-lived as the post-Revolution state in Ethiopia continued to pursue a policy of nationalization of private industries, centralization and command of the entire industrial sector. Early in the 1990’s, the new transitional administration once again reversed the command economy by initiating and implementing new policies away from state control and into greater liberalization and privatization under the general policy of market-led economic development strategy. Later on, this new direction evolved into a strategy known as the Agriculture Development-led Industrialization or ADLI for short.
The period between 1991 and 1993 was largely devoted to the implementation of what is known as the Structural Adjustment program (SAP) under which achieving macro-economy stability privatizing nationalized manufacturing industries and decentralization were the major concerns. However these positive initiatives were temporarily frustrated by the Ethio=Eritrean war of 1998-2000 and the drought and food shortage that followed in the same period. The economy slowed down temporarily to regain its lost momentum after the end of the war.
Starting from 2001, the economy started to show signs of revival and solid growth and these positive achievements were also reflected in the manufacturing industries. Between 2001 and 2009/10, the economy passed from revival to modest and then to accelerated growth. Although growth in the manufacturing industry was not as robust as one could expect, the prevailing peace and stability as well as the implementation of conducive policy environment for private investment both local and foreign have, have created conditions for the sustainable growth. The economy in general could thus register average annual growth rates ranging from 7 percent to 10 percent. This growth was largely made possible thanks to favorable commodity prices in the world market as well as greater foreign investment flow know as Foreign Direct Investment (FDI).
As indicated above, the manufacturing industry in Ethiopia has started from a very low base in terms of investment, technology, manpower or productivity. After long decades of relative stagnation or slow growth, manufacturing started to pick up momentum only very recently. According to a recent unpublished study by the Addis Ababa Chamber of Commerce and Sector Associations (AACCSA) on the state of the manufacturing industry the sector accounts only less than 5 per cent of the GDP. The share of manufactured products is only 15 percent of the total value of exports. The proportion of persons engaged in industry and allied activities accounts for less than 5 percent while manufacturing employs only 2 percent of the labor force.
Substantial growth of the sector was observed in the period 2001 and 2009/10. The number of manufacturing establishments has grown from 798 in 2000/01 to 2,172 in 2009/10 with a compound annual increase of 11.8 percent. The manufacturing sector output measured in terms of gross value of production or value-added also showed an increase of 19.5 percent while value-added production was growing at 17.5 percent and 16.2 percent respectively at market prices and factor cost. Employment has grown at a compound rate of 8.0 percent and total employment reached 187,000 in 2009/10, almost double the figure for 2000/01. The level of investment in this period has grown at an annual compound rate of growth of 11.2 percent reaching Birr 15.5 billion in 2009/10, three times the figure for 2000/01.
Despite the above indicated remarkable growth rates, the manufacturing industry in Ethiopia still remains at a relatively low level. The AACCSA draft study quoted above indicates that according to the comparative levels of industrialization of selected African countries, there are four categories based on the levels of Manufacturing Value Added (MVA). Accordingly, there are African countries categorized as forerunners or those with industrial growth performance of at least or close to 2.5 percent. Those countries dubbed achievers displayed a fairly fast growth path but falling below 2.5 percent. The third category includes African countries characterized as falling behind with a very low level of industrialization and in the fourth category come countries in what is called the infant stage of growth. These are countries with very low industrial growth performance and level of industrialization, many characterized by negative MVA per capita growth. According to the same information, the growth of the manufacturing industry in Ethiopia comes under the last category of infant stage with an MVA of less than 20 dollars. To this category belong Eritrea, Ethiopia, Djibouti, Somalia, Rwanda and Burundi.
As it is the case in all developing countries, there is a strong argument for industrialization in Ethiopia. Generally speaking, economic development requires structural change from low to high level of productivity. Hence, the industrial sector is considered the “engine of growth” in the development process. Transfer of labor from low productivity agriculture to high productivity industry results in an immediate or overall productivity and income per capita resulting in more rapid aggregate growth. This is referred to in economic jargon as the “dynamic shift effect”.
The current policy direction of the Ethiopian government stresses the creation of conditions for industry to play a leading role in the economy and is firmly established in the ongoing five-year Growth and Transformation Plan. In order to make this plan effective or realizable, a series of policy measures are expected to be implemented in the coming few years. These policies should also be geared towards allowing the private sector to play a leading role in the industrialization process. As things stand now, the government is giving relatively more attention to the state rather than the private sector. This will have to be reversed progressively if the long term growth scenario would be sustainable as well as beneficial to private manufacturers and industrialists. A series of incentives should be taken to encourage private industries overcome structural and policy constraints that have so far frustrated their optimal growth.
According to the study we quoted above, there are certain policy recommendations that can be made to achieve the objective of expediting private sector growth at a pace that could make Ethiopian products more competitive in the international market. The private sector in Ethiopia should be helped to become the leading or the most important sector so that it could pull forward the locomotive of economic growth in general. Among other things, there should be sound government policies in place and support services capable of enhancing the development and optimal use of available natural and human resources. The pivotal role of the private sector needs to be boosted further while additional policy measures need to be implemented in order to bring about the required changes to face the challenges coming from the increasingly stiff competition from the global market.
The prospects for the growth of Ethiopia’s manufacturing industry are great provided that the institutional and structural and policy constraints are removed in time in consultation with all the stakeholders and mainly with private sector actors and the business community. The government recognizes in principle that there is no alternative to its strategy of private sector led growth. There is however a big difference between recognizing this strategy and implementing it consistently. As important as the state sector is in helping the manufacturing sector, so is the private sector in leading the process by attracting domestic and foreign investment that will prove crucial in turning the country’s industry from its present infant stage to the level of forerunner or high achiever in the coming years.