Last week’s inauguration of the Hawassa Industrial Park (HIP), constructed in just nine months and at a cost of 250 million dollars, is a significant milestone for Ethiopia’s industrialisation strategy. It signifies the latest move of the EPRDF government to attract foreign investment in light manufacturing, create jobs for the burgeoning youth population and increase export earnings that will fund the country’s growing demand for hard currency. The move also embodies a welcome policy of refocusing on the country’s ample labour resources as the country’s leading comparative advantage. This is a shift in policy from the earlier decade’s singular focus on achieving surplus agricultural production of key raw materials for light manufacturing sectors, such as cotton, and skins and hides, as the economy’s launch pad to industrialisation, as envisaged in the Agricultural Development Led Industrialisation (ADLI) plan.
Yet, the past decade’s average double-digit economic growth has not delivered the expected surplus production of cash crops, with most falling short of targets set in the previous five-year plan under GTP I. Even if growth has been broad based and took place in all sectors, it is the service sector’s growth that has dominated the growth of the economy. The growth of the manufacturing sector has been decent, but its share of GDP has remained between the high and middle single digits, relatively unchanged over the past 20 years (according to World Bank figures). The expansion of the light manufacturing sector on the back of surplus agricultural production was frustrated by numerous external and internal challenges. Local raw materials production has been beset with quality issues, and susceptible to global price shocks. Weak logistics, import/export infrastructure and the scarcity of hard currency has made the option of relying on imported inputs a precarious one. Other issues, such as the failure of commercial farming of these inputs in the southern lowlands of the country to seamlessly integrate into existing manufacturing plants, have also contributed to the below par performance of the light manufacturing sector.
Efforts during the last GTP period to improve the quality and standard of local production of inputs such as cotton, skins and hides, have also demonstrated the complexity and the institutional capacity required for improving gaps in the supply chain and ensuring the production of inputs in the required quality and quantity. In the cases of inputs for leather apparel and leather goods, there are significant supply chain gaps, such as those caused by regulation and structure of the livestock market, which contributes to economic loss through contraband trade and lack of standards, inadequate veterinary healthcare, substandard handling of skins and hides during slaughter and improper storage. These all need to improve if the sector is to be globally competitive. Any such programme wishing to bring these improvements swiftly will require as much, if not more, capital than the building and running of industrial parks, which, centrally managed and regulated effectively, pose less risk of misuse and abuse of resources.
The other challenge for local and foreign manufacturers based in the country is the lack of other inputs in the production of apparel and footwear. Producers of inputs, such as buttons, rivets and zippers, tend to rely on economies of scale and are one of the major factors that determine whether a country has a strong textile and footwear sector. A strategy to transition to industrialisation on the back of surplus agricultural production alone has been antiquated by recent trends. The growing use of synthetic products, such as polyester, synthetic leather in textile and apparel, have reduced the eminence that agricultural crops such as cotton had for the apparel industry. One benefit of having large scale industrial parks, such as the HIP, is that there will be sufficient clientele and customers for producers of inputs to be established and take root in the country. This will have desirable spill overs to other sectors, enhancing the country’s capacity to develop other light manufacturing industries.
Today, early industrialised countries, such as the UK, the US and most of Western Europe, do not have such input producers – attempts to kick-start local light manufacturing in the West has floundered precisely because such subsectors and skills have been lost in the period of de-industrialisation of the 80s and 90s. Attracting such sub-sectoral industries is perhaps one of the last missing pieces of the puzzle for Ethiopia’s current industrial strategy. The opening of the Addis Djibouti Railway is also expected to overcome logistical inefficiencies, which has handicapped export-focused industries. A prime example is the success of Vietnam, which is now the second largest footwear manufacturer, after China, despite having next to no livestock resources. Its multi-billion-dollar footwear manufacturing sector is built on an extensive inputs subsector and a strong import/export logistical capacity to import required raw materials and a competitive labour market with rising productivity.
Yet, the most important and welcome change that come with the effort to attract foreign investment through building ‘nests’ such as HIP is the focus that the country is finally giving to its most important comparative advantage – having a globally competitive, affordable and youthful labour. Current opportunities, such as the unprecedented large outflow of light manufacturing jobs from China, present a unique window of opportunity to launch into the global light manufacturing scene and to make use of Ethiopia’s large demographic advantage. It should be noted that such windows of opportunity are rare and exploiting them should be a priority. The same could be said of preferential trade access that Ethiopia is beneficiary of, such as AGOA and EU’s EBA, which also help in enticing investors to set up shop in the country.
Yet, it would be imprudent to assume that these windows of opportunity will always be available. The unexpected decision of the United Kingdom to exit the European Union – possibly leading to a fracturing of the world’s largest free trade area; the unexpected rise of Donald Trump in the US on the back of populist and highly protectionist promises, are all reminders that such preferential access is based on the generosity of others and is only temporary. A protectionist and inward looking leadership in the US and the UK, two of Ethiopia’s large development partners, puts preferential trade access and vital development cooperation programmes, aimed at improving the supply chain of raw materials and inputs, in danger. There are global risks that should always be considered.
Taking a closer look into the contribution of the light manufacturing sector towards the export targets set in GTP-I, the contribution of large industrial producers has been immense. In the footwear manufacturing sector, the growth in the production and export of non-leather footwear, which the country has not produced for export in large quantities until the arrival of Huajian, has been the singular factor for the significant growth in the export figures of shoes since 2012. It is not to say other producers have not had a positive impact – but looking at the ambitious targets that have been set by the government, and the sense of urgency there should be to create a manufacturing sector that can make use of the country’s ample labour resources, it is important to invest where there have been maximum returns. If the successes that have been registered in the large light manufacturing industrial plants, such as Ayka Addis in textiles and Huajian in footwear, could be replicated at a larger scale, the gamble to put scarce capital in projects such as the HIP seems warranted and should even be encouraged.
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