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Ethiopia
Why has the industrial sector stagnated for long?
Policy explanations
Berihu AssefaDOC09010
Ethiopian Development Research Institute (EDRI) July 2010
In this presentation….• Preview of the Ethiopian economy
• Status of the industrial sector
• Policy evolution, dynamics and key players
• Analysis of 3 policy problems
• Conclusions/suggestions
Preview of Ethiopian economy
Status of industrial sector
• Stagnant for nearly two decades (about 12% to GDP
• Manufacturing alone about 3% to GDP
-20
-10
010
2030
Indu
stry
val
ue a
dded
(% a
nnua
l gro
wth
)
1980 1990 2000 2010year
bandwidth = .8
Source: WDI (2009)
Lowess smoother: Industry Value Added (% annual growth)
-40
-20
020
4060
Man
ufac
turin
g va
lue
adde
d (%
ann
ual g
row
th)
1980 1990 2000 2010Year
bandwidth = .8
Source: WDI (2009)
Lowess smoother: Manufacturing Value Added (% annual growth)
Value added (% of annual growth)
Status of industrial sector (cont.)
Average productivity (VA per worker)
• First, much lower average productivity (peak value) in Ethiopia
• Second, productivity distribution among enterprises in Ethiopia is so wide - coexistence of relatively low & high productivity firms (i.e. absence of competition)
Source: Results of Ethiopia Investment Climate Survey, Africa Financial and Private Sector Development, the World Bank, June 2007
Status of industrial sector (cont.)
Gross fixed capital formation, private sector (% GDP)
Source: Results of Ethiopia Investment Climate Survey, Africa Financial and Private Sector Development, the World Bank, June 2007. For Kenya, figures are for private investment
• Based on this figure, Ethiopia has the lowest gross capital formation as % of GDP (i.e. weak private sector)
Status of industrial sector (cont.)
• Ethiopia commands relatively lower TFP than all the other countries indicated
Policy Evolution
Key players and policy dynamicsExternal advice/coercion
Why stagnant for so long?• Despite recent reforms in
− government service delivery (speedy and less corrupt)
− Better tax administration− Some consultations with investors (hearing
complaints, though not continuous discussion)− Basic infrastructure, industrial zonation
• And business environment improvements, the private sector has not responded sufficiently, especially the manufacturing sector remains stagnant
• The question is why?• Next, policy explanations are provided
Policy explanations
3 policy problems are visible to me
a) Rural obsession (‘traditional-trap’)
b) Policy bias in favor of exports
c) Egalitarian growth as an objective
Policy problems (cont.)a) Skewed policy (“traditional-trap”)• Rural obsession - state resources have been
reallocated to rural sector for long (extension packages)
• Agriculture is almost untaxed (only negligible rent)• About 97% of inland tax revenue comes from the
urban area. • This pro-rural orientation is stated in ADLI• ADLI stipulates that smallholder farmers can create
wealth and are the starting point of industrialization – is it feasible?
• ADLI makes more sense from equity and political support point of view
• Theory & empirics predict that modern sector is engine of growth – but ADLI challenges this thought
• Because of the dominance of the agricultural sector in poor countries, it is evident that the capital required to finance industrial expansion (at least in the early stages of dev’t) would have to be largely raised from agriculture by taxation, voluntary transfer (savings), or even by forced savings
Resource flows between agriculture and industry
Policy problems (cont.)a) Skewed policy (‘traditional-trap’) (cont.)
• Despite huge supports, agricultural productivity remains very low: land policy, rain-fed, fragmented
• Gov’t learned importance of urban sector only recently• IP drafted in 2002/3 identifying priority sectors with clear focus on
export industries – the need to generate Forex.
Source: Magdi M. Amin, World Bank, 2007
Labor productivity in agriculture
Policy explanations
3 policy problems are visible to me
a) Rural obsession (‘traditional-trap’)
b) Policy bias in favor of exports
c) Egalitarian growth as an objective
Policy problems (cont.)b) Policy bias in favor of exports• IDS clearly focuses on export industries – that’s why
support is based on export performance. In line with the need to generate foreign exchange
• Sectoral priority is necessary but cost is higher when mistakes are committed (reward upgrades, new excl.)
• A fair example is garment industry – on the list but continuously on the decline.
• Adding ‘product wise support’ may solve above two problems: lowers mistakes & captures new ones
Policy bias in favor of exports
My own: support ‘tradable standard products’ rather than exports
Policy problems
a) Rural obsession (‘traditional-trap’)
b) Policy bias in favor of exports
c) Egalitarian growth as an objective
Policy problems (cont.)c) Egalitarian growth as an objective•The EPRDF is strongly committed to egalitarian policies. •Common statement from government officials: ensuring egalitarian economic growth•Also found written in policy documents•Practical evidences include:
• ADLI (focus on rural)policy, control of land ownership• About 64% of the government’s total budget is spent on
pro-poor sectors such as agriculture, education, health, water, and roads (European Union 2009).
•Not bad, if it were possible; however, there is trade off between efficiency and equity•In the process of rapid industrialization, some portion of the population may be left behind•Growth tends to produce income inequality (historically true in many cases)
Policy problems (cont.)c) Egalitarian growth as an objective (cont.)•Caring too much for equality from the beginning leads to distortion•Growth may stagnate as one discourages growth propelling entrepreneurs by income distribution•Thus, the result may be low equilibrium – i.e. too equal and stagnant society•Korea in the 1980s, Japan in the 1950s faced income inequality (rural lagged behind). •They devised mechanisms to tackle – movements•So, income inequality need to be treated as one of the adverse effects of growth, same way we treat congestion, crime, etc
It seems that government has learned that the idea that small farmers should spearhead economic development and structural transformation is proving difficult . How do we know that?
Aggressive promotion in the area of Expansion of large scale farms by private investors
Rapid and aggressive efforts in the industrial sector – policy scope widening, introducing toolkits such as benchmarks, BPR, Kaizen, etc
Invitation of foreign experts to help policy formulation and articulation (e.g. Prf. Ohno’s team) and others informally
Getting out of the “traditional-trap”(indications for policy review)
PM announced after landslide election victory last month – he will make policy reviews soon & unveil next September
Conclusions• The last 5/6 years witnessed high growth (but with little
structural transformation• Also, encouraging policy learning among authorities• Confusion in the role of agriculture still remains; ADLI
stipulates agriculture staffed by small farmers can be engine of growth ADLI (equity & political support)
• However, theoretical & empirical evidence show that manufacturing is the engine of growth
• Conduct export promotion in a way that lowers mistakes and incorporates dynamism (abandon losers & embrace new ones)
• To do so, introduce methods such as ‘product-wise’ support in addition to ‘sector-wise’ support
• The future seems bright (commitment + quick learning + etc)