In the last two weeks there were three major economic headlines on this newspaper. The first was the depreciation of the Birr by five per cent against the dollar. There were also two other issues of economic significance.

This newspaper reported on its January 24, 2010, issue that "Trade and Industry Misses Export Targets" by 59.6pc in the last six months and that "State Banks under Liquidity Crunch Threat" addressing declining customer deposits in the Commercial Bank of Ethiopia (CBE). Two meetings were planned subsequently, one at the Ministry of Trade and Industry (MoTI) to find out why exports missed their target by nearly 60pc and the other at the Ministry of Finance and Economic Development (MoFED) to address the liquidity problem and other problems at the state banks.

On the surface, the two problems appear miles apart. Underneath though, both address one central issue - the competitiveness of enterprises in Ethiopia, including the export sector in the global market and public banks against emerging private banks in attracting depositors.
 

Can devaluation of the Birr or recapitalisation of the banks improve the situation? I am sceptical because the problem goes deeper than the exchange rate. The root cause is the competitiveness of Ethiopia's products on the global market.
 

Interestingly, the competitive advantage at enterprises and nations is a very well studied subject. Michael Porter (Prof.) of Harvard is recognised for pioneering the competitive strategy of enterprises and nations by challenging conventional views. His work provides clues as to why these institutions struggle and what should be done to turn these weaknesses into opportunities.
 

Porter, in his article headlined, "The Competitive Advantage of Nations," presented a radical approach that differed from a classical view of economics. After studying 10 important trading nations from Japan to the United States and from Italy to Denmark, he came to an understanding of what makes nations and enterprises succeed on the global market.
 

"National prosperity is created, not inherited. . . It does not grow out of a country's natural endowments, its labour pool, its interest rates, or its currency's value, as classical economics insists," he wrote. "A nation's competitiveness depends on the capacity of its industry to innovate and upgrade."

As evidence, neither Japan nor Korea has resources to be among the most prosperous nations in the world. Their competitiveness arises because of the pressure of change.
 

On the positive side, the CBE is now facing pressure for the first time since its founding in 1963. This may help it to "innovate" and think of new ways to get customers rather than waiting for them to come and beg for its services, as it used to do in the first 47 years of its existence. Nevertheless, if it continues to do the same old thing, I am afraid that no capitalisation can save any state bank from an eventual unpleasant outcome.

It is this rivalry between firms that increases the competitiveness of enterprises and nations, Porter argues. In fact, the financial sector in Ethiopia can no longer avoid facing bigger competition from global players. Liberalisation of the financial sector is only a question of when.
 

It is only through this competitive spirit between domestic players that the financial sector can prepare itself for the bigger challenges to come.
 

The banking sector requires a radical review of its business model, including customer service, use of technology, marketing strategies to understand customers' needs and desires, and improvement to its brand image by meeting and exceeding customers' expectations. This rivalry between emerging private banks and the state banks is a positive development that could propel Ethiopia's banking sector into the 21st Century. Hence, government intervention on the side of the state banks should not lead to the postponing of needed innovation and change.
 

If decision makers choose the easy way through recapitalisation and postpone innovation and change, the public banks will not only be ill-equipped for the challenge ahead but they will also undermine the prospects of private sector competitiveness by not raising the standard. 
 

An interesting analogy of Porter's theory is found in Haile Gebrselassie, Kenenisa Bekele, Tirunesh Dibaba as well as Meseret Defar, who all became the best athletes not because they competed on the global arena but more importantly because of the domestic rivalry they had to face. Unless they got up early in the morning and trained, they knew that they would only see the back of a younger athlete sprinting by.

The same holds true for an industry.
 

The Japanese automotive and electronic industries, the US silicone valley, and the Italian fashion industry compete against each other in the domestic market to bring the best products at a lower cost into the global market. Without opening all sectors to competition, from telecom to utility providers,  underlying costs of manufacturing cannot be improved and Ethiopia's exports will remain expensive on the global market. 
 

A drop in export earnings by 59.6pc in the last six months is too big to call a meeting and urge exporters to do more. Though devaluation of the Birr is one-step in the right direction, it is only addressing the symptom rather than the root cause. Ethiopia's product is not selling on the global market because it is expensive.
 

Remember, there was a similar discussion about six months ago, and some of the coffee exporters were blamed for hoarding coffee. They were reluctant to sell at discount prices because the price of a kilogram of coffee in the local market was higher than on the global market.
 

Now, the problem is even bigger and the global recession could be a convenient scapegoat. But, that will not solve the root cause.
 

Why was a kilogram of coffee more expensive in Addis Abeba than on the global market? Why does a telephone call, a bottle of water or beer, a bag of sugar or a T-shirt made in Ethiopia fetch as high a price as those of developed economies? Why does the lease price for land, building rental or a hotel room cost much more dearly than in Spain?

Is it because they are artificially inflated by a government monopoly on the supply side, or is it due to extra costs incurred due to inefficiency in production and delivery of services? These simple questions need to be answered.

The government's policy has a significant part in making Ethiopia's products less competitive. Government owned monopolies have been competing among themselves in raising prices from telephone charges to land leases to a bag of cement.
 

A five per cent reduction in utility costs through efficiency practices could have a greater impact in improving competitiveness and reducing inflation than depreciating the Birr, which will feed into inflation by increasing the costs of fuel and other imported goods.
 

It would be futile to think that products that are not competitively produced or priced would get buyers in the global market due to marginal devaluation of the Birr.
 

The failure of Ethiopian products to take advantage of the opportunity the United States has offered under the African Growth and Opportunity Act Plus (AGOA+) is a good example. Ethiopia's export earnings from this act are in the range of 10 million dollars. Compare this to Lesotho's 340 million dollars.
 

A full 2008 table is available at the Central Statistical Agency (CSA) of Ethiopia, but for the sake of simplicity the author has converted the currency to dollars using the 10 Br to one dollar rate of 2008.

Ethiopia ranks at 118 out of 133 countries in its competitiveness, according to the 2009/10 Global Competitiveness Index. We are 38 points behind Egypt, 20 points behind Kenya, and 18 points behind Tanzania. Even Uganda, with its small economy and population size is 10 points ahead of us.

When we look deeper into the sector level, we rank 127 out of 134 countries on the issue of financial market sophistication. 
 

This lack of total competitiveness needs proper study and biannual action. We produce cotton, and we make T-shirts, and yet our exports to the US have not improved even with an import tax advantage.
 

Would the five per cent depreciation of the Birr and the previous series of devaluations change anything? It remains to be seen.

In some of the basic requirements such as the quality of institutions, labour market efficiency, and domestic market size, Ethiopia fares better. The picture is different when it comes to efficiency enhancers such as intensity of local competition, financial market, and technology readiness. Here Ethiopia drifts to the bottom of the list.
 

That is why there is a need to step back and see the whole picture rather than just urge exporters to do more. Our products need to be produced and priced competitively to win customers in a competitive world market. To achieve that, baseline costs, such as land, and the costs and quality of public services, such as utilities, have to change.
 

Our products are more expensive than that of the Chinese and not because our labour, material or energy costs are higher. Start-up expenses and significant inefficiency expenses cost us a lot and need to be recovered through price increases.
 

Both are in the hands of macroeconomic policymakers who must address the supply side constraints to bring down the baseline costs of production.

The contemporary global recession could be an opportunity to see how to increase the competitiveness of our products and services in the domestic as well as the global market.

For Japanese companies, the 1973 oil crisis was an opportunity to think differently, and they come up with cars that are more economical and lean and a manufacturing system that gave them competitive advantages in the 1980s and 1990s. That is why the export sectors should see this challenge as an opportunity to innovate and change to satisfy domestic as well as global customers. It is through this competitiveness that prosperity can be created.
 

Unfortunately, innovation is often solely associated with technology, but it also includes new ways of thinking and doing things. This applies to top macroeconomic decision makers in their quest for low-cost service provision to local entrepreneurs. It is about focusing on creating a competitive advantage for Ethiopia's products on the global market. This will go a long way in promoting exports as well as closing the huge imbalance on foreign trade.
 

For some time, Ethiopian authorities have encouraged exports. But as shown in the graph, it is heading nowhere. Instead, Ethiopia's trade deficit has been growing at an alarming rate as exports lag behind. Ethiopia's imports in 2007 were worth about 5.2 billion dollars with revenues from exports worth 1.1 billion dollars. The economy was left to shoulder a burden of four billion dollars in deficits. Of the total import value, about 1.5 billion dollars was spent on the procurement of oil.
 

Indeed, foreign direct investment (FDI), remittances from the Diaspora, income from tourism and official foreign assistance may contribute to narrowing this gap. It ought to still be worrying when the national export fails to cover even the cost of petroleum imports, though. 
 

More importantly though, the solution must not start and end with exporters. It requires a wider strategy to create a better competitive advantage by creating a much leaner, less bureaucratic efficient production and delivery system.
 

Changing the reputation of the country from a famine and disaster prone barren piece of land will help make Ethiopia's products and services a more popular choice in the market as well.
 

Nations have brand value on the global market. A tag of "Made in Germany" or "Made in Japan," for instance, adds a premium to a product. A country needs to brand itself in a positive light.
 

Promoting and penetrating into new markets also requires changing mindsets. For example, in the age of information technology, one may send an inquiry about Ethiopia's products and services to the MoTI website or to an Ethiopian embassy, but experience confirms that rarely do such people get a prompt response, truth to told.

In the absence of a fundamental shift in addressing the issue of Ethiopia's competitiveness, exports may not improve through a biannual "urging of the exporters" to do more.

Yared Haile-Meskel

materials development engineer.