The more complex human demand becomes, the more intricate grows the productive process of making ends meet. Production has been mechanised, while the sphere of competition has been globalised with manufacturing being financially more demanding, technically complex, and competitive than before.

Shifting the investment regime from unproductive to productive sectors is essential to sustain economic growth, argued Prime Minister Meles Zenawi during a meeting with business people on May 23, 2011. Picking another unpopular agenda, he asserted that domestic investment is highly skewed towards unproductive and sectors prone to rent seeking.

Risking national security, peace, and stability might drive Ethiopia to become a warlord nation like Somalia, he warned. As long as the forest of rent seeking, where public and private corruption is bred, remained, the country’s slide toward disintegration would be inevitable and ultimately lead to crisis, he claimed.

On the other hand, shifting investment from unproductive sectors to manufacturing would redeem the nation from indirect seizure by the Chinese, Turks, and Indians, proclaimed Meles.

The EPRDF’s sudden policy shift is indicative that its agricultural led development strategy proved unsustainable, argue the political opposition. With agricultural productivity hampered by land degradation, rising population density, water scarcity, and unaffordable inputs, it was unwise to spend two decades testing a strategy that proved not to be viable, argue the political opposition.      

Industrialisation demands a meritocratic and tech savvy leadership, but the EPRDF is structurally inclined toward the agrarian rural population, an attitude that would not help create industrialisation, opponents contented.

Indeed, shifting investment towards expansive manufacturing is a huge challenge because it entails skilled manpower, a responsive bureaucracy, and a favourable competitive climate.                  

A bulging youth population, mounting urban unemployment, increasing rural-urban migration, and the rising cost of living are clamouring for productive absorption capacity to be expanded.

The creation of sufficient absorption capacity through accelerated manufacturing is impracticable, at least in the short term, given the bureaucratic red tape and political frailty on the all too unlevel playing field.

Industrial growth rate averaged 11pc between 2005 and 2010, while the service sector expanded by an average of 14.6pc, according to the GTP. Industry’s share of the real GDP was 12.9pc in 2010, when agriculture and services contributed 41.5pc and 45.5pc, respectively.

Given this disproportionally low share, rapid structural shift is certainly not on the horizon.

Yet, with export as percentage of GDP standing at 5.4pc in 2010 and import as percentage of GDP staying at 26.1pc, an enormous opportunity for import substituting manufacturing exists. The prospect is augmented by the availability of cheap labour from a working age population that comprises 39.8pc of the total. The stakes are high.

Ethiopia is ranked 66th out of 144 countries in the Global Competitiveness Index (GCI), an economic rating performed by the World Economic Forum (WEF). The interplay of factors ranging from education quality to market efficiency and technological readiness is measured by the index.

With a score of 4.2 out of seven, the country stands far below Switzerland, the most competitive economy in the world with a score of 5.6. The 2.7-point score differential shows the challenges Ethiopia faces to establish a vibrant manufacturing sector.

Functional illiteracy is high. Over 50pc of grade two and grade three children cannot read or write, according to RTI International, a research institute. The quality of education is the principal barrier to manufacturing takeoff.

The student-teacher ratio stood at 68 to one in secondary schools in 2010, while only 13pc of Technical and Vocational Education and Training (TVET) students qualified for competency certificates this year. This is the depth of the challenge.

Enrolment in institutions of higher learning increased by over 130pc between 2005 and 2010, while the production of entrepreneurial and employable skilled manpower continues to challenge the education system.

Manufacturing involves a series of processes from supply chain to stock and distribution management. These require advanced training and reliable working discipline. Poor education is thus detrimental to effective industrialisation.        

Unproductive investment evolved from insufficient competitiveness in the market, as Meles articulated.

Yet, as the country’s average tariff rate stood at 17.3pc in 2009, significantly higher compared to the Sub-Saharan average of 11pc, the marginal cost of manufacturing is high. As a result, competing with regional economies becomes exigent since Kenya, Tanzania, and Uganda have an average tariff rate of 12.6pc.

Distortion of prices and interest rates by the state also creates a burdensome business climate, pushing the country down to 144th position out of 179 countries on Global Index of Economic Freedom (GIEF), in 2011.

Investment in the manufacturing sector is additionally deterred by the unpredictable policy regime, indistinct labour standards, and opaque business registration system. Not only is the policy out of sync with the interests of business people but it also hampers a positive cycle of prosperity.   

The belated lifting of the price control system illustrates how unpredictable the policy regime is. This is a high risk factor for long-term investment in manufacturing.

With memories of pharmaceutical factories being closed due to the government’s failure to establish regulation of procurement precedence still fresh in the minds of the business community, state guided investment shifting could never be painless. Hence, the Revolutionary Democrats are faced with the challenge of scaling up the competitiveness of domestic factories without incentivised protectionism.

On top the structural problems, the bureaucratic red tape encountered at each phase of manufacturing discourages productive investment. The cost of investing in the manufacturing sector is increased by hierarchical custom clearing procedures, unpredictable duty regimes, as well as corruption during transit and clearing.

Manufacturing is an interlinked process. Creating forward and backward linkages with other sectors geometrically increases the cost of the bureaucracy along the supply chain. The conditions of investing outside of cities are made worse by superimposed bureaucratic procedures in regional states.

With an envisioned growth rate of 20pc between 2010 and 2015 (in a base case growth scenario), and plans to elevate the contribution of industries to the GDP to 15.6pc in 2015, the industrial plan remains ambitious.

Yet, rerouting investment flow into manufacturing requires less rhetoric and more concerted policy measures.

Mainstreaming a quality control system within the educational system is imperative to achieving this end.

A programmatic quality control approach is not working, but integrating the system within the formal curriculum could be the way forward. Equipping students with hands-on knowledge and skills about supply chain, stock, production, and distribution management should be the entry point.

The establishment of a demand driven, student centred, progressive TVET system is crucial to effectively involve TVET graduates in the production line. Newly established technology institutes should be refocused towards producing tailored production solutions for current and future industrial problems.

To enhance global as well as regional competitiveness, the tariff regime should be revised, at least to fit the Sub-Sahara African average. Strict enforcement of procurement precedence for local factories would help build local capacity, aside from attracting investment, without entailing protectionism.

Distortionary state intervention should be avoided at all cost, as it will affect business confidence and long-term investment.   

There should also be a genuine move towards flattening the bureaucratic work flow that unnecessarily drags progress. A new approach towards overhauling the customs bureaucracy could help usher in transparency and contribute to building business confidence.       

The Revolutionary Democrats should learn from the past and be careful of taking another unpopular step. At times, what seems painless might turn out to be thorny. Redirecting investment to the manufacturing sector might prove the same.