Which Way Should Ethiopia Industrialise?

OPINION

By Getachew T. Alemu

Lately, the trend of discussions within my circle of friends has changed. In one way or another, I find myself discussing industrialisation.

This may be a reflection of the change in the economic structure of our fair nation. But it may also be just because I have friends who love to discuss what is going to come.

As much as I love discussions about Ethiopia's industrialisation, a process that is close to overwhelming us whether we like it or not, there is no clear national ambition on what type of industrialisation ought to be pursued. For starters, by type of industrialisation, I mean the source of capital, sectoral focus, size of production, use of technology, ownership, backward and forward linkages, utilisation of factors of production, location and so on.

The economics of the subject tells us that industrialisation is a process whereby labour is moved away from the static, less productive and low return sector to the dynamic, highly productive and high return sector.

If one is to go by the linear model of economic growth, a highly influential conceptualisation of growth, even if it has been partially disproved, this transition is a natural process. It is driven by returns on the factors of production. Of course, environmental factors, including policy, have their own influence, but they largely express themselves through the returns on factors of production.

Another definitive concept in the industrialisation process is that of comparative advantage. Promoted by the renowned economist David Ricardo, this concept is all about looking into the costs of production and orienting trade structure in the same line.

Cost of production, largely defined by the relative structure and distribution of factors of production, not only within a given nation, but also amongst jurisdictions, is considered the driving force in this conceptualisation. Yet again, policy forces are seen to manifest themselves through costs of production.

Regardless of the multiple new industrial theories, more complex than these classical ones, it looks like Ethiopian policymakers are still fond of the old theories. Hence, it may be beneficial to describe basic concepts.

Indeed, Ethiopia is at the definitive moment. It needs to find a way to sustain the growth it has been witnessing for over 12 years now, if it is to stay stable. And this has largely to do with its bulging youth population. It cannot absorb its increasingly young, and largely unemployed, population by pushing the walls of the relatively static agricultural sector.

Needless to say, there is so much space for improvement of productivity in agriculture. Yet, there are also natural limits to it. This is expressed in terms of area of arable land, availability and distribution of water resources, soil fertility, population density and production technology. 

Unfortunately, development has gone in a different direction over the past six or seven years. Unlike the linear growth model, the Ethiopian economy was swayed towards the service sector without taking a grip in the industry sector.

As a result, the economy adopted a middle-waved, cone-shaped structure with the edges built by agriculture and services, and industry constricted in the middle. This is expressed through contribution to gross domestic product (GDP), employment base, total capital formulation and total investment.

Thus, the industrialisation agenda is not only about channelling investment to the constricted part of the wave, but also draining away surplus from the two edges.

This job, easier said than done, is also about slowly shifting key factors of production, mainly labour, towards industry. It also is about enhancing labour productivity through skilling and re-skilling, deliberately distorting the cost structure of factor endowments to favour industry and converging environmental factors, mainly policymaking, in both fiscal and monetary fronts, towards industrial investment.

For Ethiopia, there seems to be two fundamental ways of doing this. One way is to attract as much foreign direct investment (FDI) - a key element of external capital - as possible, towards the industrial sector.

In a world where major emerging economies, such as China, are fast losing their competitive labour cost advantage and capital is relatively cheap, largely due to the ongoing global economic recession, Ethiopia seems to be well-positioned to take advantage of this. With governments of developed and emerging countries dedicated to helping their companies go outside and seizing whatever economic opportunity is there, as could be seen from the increasing emergence of EX-IM banks and state-driven venture financing schemes, there is a positive push in this.

One can add the local factors in here. A government highly interested in FDI, as can be seen from highly talked about visits of officials in developed and emerging nations, not to mention foreign missions having a major job function of attracting FDI, favours this approach. The much more glaring evidence is the multiple industrial zones, better termed special economic zones (SEZs), being established around the country.

The plan seems to be to create multiple hubs of SEZs that could serve as aggregators. With these in place, then, industrialisation and urbanisation can be facilitated. This plan seems to aspire to create an Ethiopian version of China.

Unfortunately, there are challenges for this plan. First and foremost, it gives disproportional economic benefit to outsiders. With capital coming from outside and being owned by outsiders, Ethiopians will not be the ones owning their economy. Their fate will be limited to being employed in the industrial establishments owned and managed by foreigners, who, by virtue of the investment benefit they have, will repatriate their benefits. The long-term effect of such an approach is disastrous, as the recent experience in Vietnam, wherein locals rose against foreign investors, showed.

Besides, such an industrial base will have very thin backward linkages with the agricultural sector. For an industrialist with such an investment, there is no sense in buying inputs from the local market, especially considering the market fragmentation she ought to deal with.

Low produce quality, high transportation cost, poor (undeveloped) market and economic infrastructure, and cultural and social factors, will further complicate the case. This means that little goes into agriculture from such an approach to industrialisation.

But there are also technical challenges to this approach. FDI-driven industrialisation, even if it is directed at light industries, will be relatively advanced in technology. Operating such an industrial base will not be possible without having labour skilled in essential technical and management capabilities.

And there is a significant shortage of such labour in today's Ethiopia. It seems that the problem will persist for a long time, with education still focused on theories and Technical Vocational Educational Training (TVETs) not aligned with market demand.

Adding to the mix of challenges will be the sluggish logistics sector of the nation, which poses huge costs for exporters; a cumbersome (and corrupt) Customs scheme; bureaucratic quality assurance system; uncompetitive (and undercapitalised) financial market; volatile foreign exchange situation and global market dynamics.

The alternative is to build industrialisation from the bottom-up. This means utilising the surplus created from agriculture and service sectors to progressively build an industrial base, owned and managed largely by the local people. This approach will be based on the economics of clustering.

Clustering, an endogenous growth approach, involves bringing smaller production units together in a systematic way to create a bigger economic impact.

In an industrial sense, this involves bringing smaller industrial establishments together so that they can benefit from the very process of coming together. Clustering makes Economies of scale, infuses linkages between them, enables them to have access to resources (such as credit) and markets they would have not accessed otherwise, and provides them opportunities for knowledge (and technology) transfer.

Economically speaking, this approach is less capital intensive and creates sufficient backward and forward linkage. There may also be no need for a significant change in policy as much of it will be built from what exists. Largely, it will be a systemic re-arrangement and scaling-up process.

Under the Ethiopian reality, this approach could enable locals to own their own future. Not only would it give the chance for the educated (and largely unemployed) youth to be business owners, in their own right, but it could also bring a wholesome economic integration.

The ongoing micro and small enterprise (MSEs) development effort means that the whole process will be a tactful re-arrangement of what is already here. The ongoing intensive infrastructure investment effort could also serve as a tailwind to the process.

The skills and technology side of this approach are also favourable to the Ethiopian reality. In terms of skills base, such an industrial base is not as demanding as FDI-driven ones. The technology is also easily operable, maintainable and manageable. This means graduates of the existing higher education institutes and TVETs, with some tailored training, can easily operate.

Other essential facilities, such as access to finance, land, market, logistics and technical support, can also be built on what exists. Reforms can also be initiated to tailor existing systems to serve the cluster of industries, and of course avoid roadblocks.

The major benefit of this approach will be its linkage to the agriculture sector. If the clustering job is done thoughtfully, then, a really 'big' push can be created in the economy by optimising the linkage between the clustered industrial bases and agricultural production in the surrounding area. Differentiated crop and animal production around Ethiopia, largely a result of landscape and weather, means the clustering can be done along production value chains.

But implementing such an industrialisation demands a strong and effective state. Not only should the state be sufficiently decentralised, it ought to have capable bureaucrats at each level that can stir the whole process with commitment. Without a state that thinks and acts like one, such an approach will be difficult to realise.

It is not only about having an effective state, though. Unlike the FDI-driven approach, which has relatively lower dependency on local markets, this approach needs functionally effective local markets. Lack of responsive local markets means rigidity in production, and hence ultimate failure.

Considering the challenges of both approaches, however, the best thing for Ethiopia to do is to have a mixed plan. I would argue that having the best of both worlds and crafting an industrial plan with both bottom-up push and FDI drive will be better. Where one approach reaches the limit, the other can begin.

Hence, the question should not be an "either or" one. It should rather be about where, when and how should each of the approaches be implemented. It is in the artful integrating of the two approaches that Ethiopia's future lies.

As much as Ricardian analysis might help in the quest for the rightful integration of the two approaches, though, the whole process will also involve experiments. It may be in the realisation of this experimental nature of industrial policy that the discussion with my friends never brings any conclusive remarks. And honestly speaking, that is why I love these discussions.

Source: AllAfrica