Matters pertaining to industrialisation and creating competitive industries are always debatable. A viewpoint by Getachew T. Alemu, headlined, “Which Way Should Ethiopia Industrialise” (Volume 16, Number 791, June 28, 2015), has provoked my thoughts on this issue.
But I had to go through my previous writings in this newspaper. A few years ago, I wrote an article on industrialisation and industrial competitiveness on the major premise that while social structure and political institutions play a vital role to realise industrialisation, the basic foundation should be laid at industries’ level as they are the main drivers of economic transformation.
Answering the question of ‘how’ is difficult due to the fact that there are no off-the-shelf solutions that fit every country’s industrialisation needs. Leaving aside the history of industrialisation in Europe in the 19th Century, the past three decades of industrialisation in Southeast Asia tells us that the process is multi-faceted, painstaking, piecemeal, time-taking, complex, riddled with trial and error, and involves many players.
Being concerned with the growth of the service sector and almost stagnant agriculture, which cannot absorb the increasing youth population, while leaving the industry constricted, Getachew came up with a debate-stirring article on how to industrialise.
The rigorousness of his article lies in that it gets down to the bottom of the issue leaving broader macroeconomic aspects, and investigating two options: foreign direct investment (FDI) and local clustering. Its shortcoming is that it fails to explore major players in Ethiopian economic dynamics: the state and big private local investors.
In his investigation of both options, Getachew puts forward the challenges and the policy options that the government should pursue. Though, he suggests a cocktail of both (selecting the best from each), he is reserved in prescribing solutions: ‘what for which sector’. He left them for policymakers.
The writer credits FDI for creating huge employment opportunities. Foreign ownership; repatriation of surplus; lack of linkage with the agricultural sector; need for advanced technical skills and logistical problems are mentioned as challenges of FDI.
Even though the writer suggests a mix of FDI and local clustering for industrialisation, it is possible to infer from the great space he devots to clustering that he seems in favour of local this option. He is probably concerned by the excessive attention given to FDI by the government, and believes that the challenges posed by FDI are significant.
Government’s development model and past experience would lead us to understand why it is so desperate for FDI in our industrialisation process. The government is inspired by East Asia, where FDI and an export-led strategy have played considerable roles in their industrialisation. Moreover, limitation of local capital for large scale industries, desperation for foreign currencies, hope of technological and technical skills transfers, and access to foreign markets have made the government look for FDI.
If we also go by the past couple of decades’ experience, efforts to lure well-capitalised local investors to engage in industry have not been as fruitful as expected. Local investors have been reluctant to engage in industry, particularly manufacturing, as it bears considerable risks and lower returns; is complex and has a long value chain, whereas the service sector, such as imports, exports, wholesale, real estate and rental, have less risk and bring in high returns in a short time span.
The challenges posed by FDI cannot be discounted, but there are many ways of diluting the influence of FDI: encouraging local participation in the form of joint ventures; tackling the problems that plague the agricultural sector to create linkage with industry; improving the existing Technical, Vocational Education and Training (TVETs); expanding and improving service provisions to curb logistical problems; and creating means by which local manufacturers will be able to acquire the technological knowhow from FDIs.
Some of the above suggestions are underway. Large scale agriculture is being promoted; industrial zones and parks are being built with many service provisions in one place and infrastructure is expanding to tackle logistical problems. A notable example is various rail lines under construction all over the country.
In Getachew’s analysis of clustering, he says “In an industrial sense, this involves bringing smaller industrial establishments together so that they can benefit from the very process of coming together” and lists the benefits as, being less capital intensive, creating sufficient backward and forward linkage, no need for a significant change in policy as much of it will be built from what exists, could enable locals to own their own future and in terms of skills base, such an industrial base is not as demanding as FDI-driven ones.
Local clustering, despite being politically appealing and theoretically plausible, has its own challenges that are not well-explored in the article. Clustering large number of small scale manufacturers is cumbersome. Local clusters work with small amounts of capital and are prone to smallest economic hiccups.
They require huge government resources and support to evolve and grow. For instance, small scale input producers for condominium houses construction are riddled with so many problems. In the absence of a government prop up, many of them would be out of business. Technological transfer among small scale manufactures, which employ pretty similar methods of production, is low.
While there is consensus among Ethiopian economic policy gurus that economic transformation from its agrarian base to industrial economy should be state-led, this includes among other options, directly investing in major industries such as metal, sugar, fertilizer, chemicals, and plastics; it is bizarre that Getachew’s article left the role of the state as direct investor in the industrialisation process untouched.
It is pretty understandable from his previous writings that he distrusts the state’s large scale involvement in the economy. In current Ethiopia, this is not a pragmatic observation. We cannot ignore the state, at least for the foreseeable future, as it is playing a major role.
The dream of industrialisation cannot come true by having cheap factor costs. The policy focus should be on creating an industrial sector that translates those factor cost advantages into globally competitive products. Recognising the actors and what roles they can play is crucial.
The state has so many roles to play. Apart from maintaining macroeconomic stability and good governance, the government has to deal with a number of issues. On the one hand, it has to continue investing in big industries such as sugar, metal and energy production. On the other hand, it should expand infrastructure and education, with particular focus on practical skills and basic health.
Encouraging FDI for industrial investment, particularly for exportable items, is of paramount significance to generate desperately needed foreign currencies, create employment and import new technologies and technical know-how. Maintaining unreserved efforts to attract well-capitalised local investors to engage in industry is also as important as encouraging FDIs.
The inclusion of big local investors in the industrialisation process would partly mitigate the threat arising from foreign ownership. This requires making large scale manufacturing attractive for local investors by expanding the various sweeteners, curbing the bottlenecks that crippled the sector, and increasing the economic costs of engaging in the services sector.
Local clusters are part of the industrialisation process, but the possibility of their emerging as global competitors in the near future is slim for so many missing local factors. I quote from an article I wrote a couple of years ago about what made the Italian ceramics industry a global player.
“The condition of local demand, unique taste of consumers, and intense rivalry among competitors helped the ceramic tile industry to come out globally competitive.”
In light of these facts, Getachew is right for pointing out that local clusters should be targeted for local markets in industrialisation process. Large employment created through export-targeted industries also has the potential to create huge local demand for various consumer items.
It is the task of the state to identify those areas that suits local clusters, and provide them the various forms of support they need to thrive and flourish. Industries that have huge local demand, utilise local raw materials, use less sophisticated production methods, are small scale, less capital intensive and employ large numbers of people are well-suited to local clusters.
Leave a Reply