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