Improved Services Essential for Better Industrialization

These days various issues overwhelm a typical Ethiopian. From the release of an album by a popular Ethiopian pop musician – often considered as the voice of dissent against the political establishment, if not a reminder of the glory days of the Great Abyssinian Empire, Tewodros Kassahun a.k.a. Teddy Afro, who is received with huge fanfare – to the rather murky state of affairs of the ruling party (EPRDF), the public space is crowded by tensions, concerns, excitements and worries. Much as it is common to listen to the nationalist songs of Teddy Afro in all music shops and cafes across the nation, it is also prevalent to find people complaining about the state of governance in the country.

Analysts agree that the time is defining for the ruling EPRDFites. On the one hand, they have to fight against a political rhetoric, like the one implied in the songs of Teddy Afro, that challenges their line of the story built for the last 26 years. For starters, their line is all about building a nation from the ground up, albeit by respecting the rights of groups with linguistic and cultural identities. As the popular line within the camp of the ruling elite goes, the long overdue line of glorifying “nationality” over linguistic-cultural identities of groups has been damaging to the existence of the nation and hence has to be turned around. As such, they envision that “Ethiopianism” has to be built on the will of groups with defined collective identities (called “ethnicities”, in the official parlance).

Not far from the fight over ideas, ideologies and visions, there is a considerable challenge that the ruling elite have to overcome. And this relates to practical policy actions. A bulging youth population means that they have to make sure their economic policies are capable of creating a sufficient amount of new jobs. Subsistence agriculture of ten rocked with natural and man-made shocks, such as the current drought that has put over seven million Ethiopians under the risk of starvation, means that they have to invest in mechanisation, enhanced input supplies, improvement of productivity, building household resilience and asset formation. Cities, including the metropolis, are faced with problems of public service provision, deteriorated infrastructure, huge rural-urban migration, expanding inequality, growing social problems (such as addiction) and corruption.

To make things worse, the macroeconomic front is also hugely burdened. The fiscal front sees constrained public revenue generation (mainly because of an undiversified and restrained tax base) coupled with an expanding expenditure line. As such, the fiscal space is revenue-constrained. A growing list of big national projects – from the 6,000Mw dam over the Nile to a cross-country railway – entails that the expenditure line is sufficiently overwheled. New commitments, such as the 10 billion Br Revolving Youth Loan Fund and budgetary allocations to supply emergency food assistance to drought-stricken areas, further the expenditure side of the fiscal space. The resultant outcome has been a fiscal space that is witnessing considerable and growing deficit.

On the monetary side too, exchange rate instability and a deteriorating external reserve position remain major challenges to the economy. Inflation, largely a monetary phenomenon, is swirling around the high ends of the single digit, with the latest figure being 8.7pc.  Turmoil in the financial sector – including a volatile liquidity position at private banks, and growing NPLs at the state-owned development bank and frequent changes in operational policies at the state-owned commercial bank – is fueling the uncertainty in the monetary space.

While all this is going on, one event remains the focus of the ruling elite – industrialisation. The subject has become the staple of events that the bigwigs of the ruling party bring up. From television shows to public events, transforming the agriculture-dependent economy of the nation into one that gets much of its earnings from industries remains an oft-repeated line. Quoting the Industrial Development Strategy of the country, which foresees to take the country to middle-income level by 2025, has become the norm in the power circles.

Industrial Parks (IPs) are considered the prime platform of bringing industrialisation to the nation. By way of building IPs, supplied with all essential infrastructures, the government foresees to attract foreign capital, technology, market linkage and know-how. In doing so, the government foresees to create millions of jobs for the unemployed youth of the nation and facilitate future wealth creation. IPs are being established in areas as varied as Addis Abeba, Hawassa and Kombolcha.

Essentially, the Industrial Development Strategy of the Nation bases itself on the attraction of FDI. Instead of sitting and waiting for the investment to come, however, the state will be playing an active role in creating the inertia, directly and indirectly. Directly, it will be investing in various forms to bring in pioneers. Indirectly, it will use its regulatory leverage to make the environment conducive for industrial investors.

Much as the efforts for industrialisation are going on, there is an uphill battle that the ruling elite ought to win. And this involves correcting the current structural distortion of the economy. As it stands, the Ethiopian economy is service driven. Be it regarding sectoral share to gross domestic product (GDP) or annual growth rate, the service sector outstrips both agriculture and industry. The service sector has become the largest non-agriculture employer and corridor of value addition (and wealth creation).

Looking at this distortion, one may think the challenge for the ruling elite as either an industry or service question. And in many senses it is. But it is not entirely a choice between sectors. Rather it is about devising ways to integrate these two sectors and looking at the best means to facilitate industrial value addition through the service area. In earnest, this is the one thing that is missing in the Industrial Development Strategy of Ethiopia.

Operationally speaking, manufacturing hugely relies on the service sector. A typical manufacturer uses recruitment (job placement), accounting, mailing (delivery), transit, forwarding, training and human resource development, branding and marketing, research (consultancy) and catering services. Depending on the type of product the manufacturer provides, the list of services it relies on may even be more than the above list. In thinking about the operational efficiency, annual earnings, foreign exchange generation or job creation capability of a given manufacturer, therefore, one is thinking about all these services. The structure, integration and efficiency of these various services are, therefore, key to the success or demise of the manufacturing sector.

Policymakers could not talk about the manufacturing sector without considering the state of these services. Any policy action that intends to bring success in the manufacturing sector has to adequately recognise the role of the various services vital to the manufacturing process and work to improve their state.

Unfortunately, the state of these services in the Ethiopian market is dismal. Institutionally, these services are poorly structured. It is often difficult to find companies with strong, resilient, flexible and properly defined internal structures. Most of the service providers are small in size too. Their level of professionalism and standard of service provision is low.

In terms of human resource capacity, service providers are not adequately staffed. The educational readiness and skills base of the service providers is far behind what the industrial sector demands. As a result, the innovation cycle of the service providers is often inferior. Most are understaffed and usually operated like family-run businesses. Not only are the service providers too rigid to adapt to the changing environment, they also stand way behind in following key international standards of service provision.

Serving the industrial sector is unique in that it demands living up to the cost, quality and time limitations of the sector. Unfortunately, the service sectors that could have underpinned profitable manufacturing do not have a culture attuned to these key manufacturing aspects. Their working discipline is second-rate and their culture unfitting.

The dismal state of essential services is, however, a result of years of policy inattention and regulatory burden. There is a common economic stereotype that sees services as inferior to the industrial sector. This categorization has been there in the economic textbooks since the times of the linear economic development models. The manufacturing sector gets policy primacy. Policymakers are recommended to focus on moving labour from agriculture to industry (from low productivity to high productivity sectors). This, however, happens despite the fact that basic economic rules account for service provision in the manufacturing process in the form of transaction costs.

It is this very long outdated economic stereotype that is happening in the Ethiopian policy space. While much is being said about the plan to facilitate industrialisation in the nation, there is little talk about how to enhance the standard of key service sectors without which profitable manufacturing cannot happen. There is no national strategy that analyses the state of these services and looks to improve their status. It all goes as if the machines will run themselves, export their product and generate foreign exchange. The fact is they cannot. They essentially need the help of key services.

Developing key services, therefore, is essential to see better industrialisation. It is not a choice. Rather it is compulsory. And this cannot happen in vein. It needs tailored strategies, focused investment and targeted interventions.

Hence, the ruling EPRDFites have to define their lines of policy to develop the key service sectors. Much as they are strategizing towards redefining the concept of nationality in the nation and investing in the industrial parks, they have to also frame their approach towards these key services. It is only then that they could effectively facilitate structural transformation in the nation. And only then could their rhetoric be backed by changes on the ground.

By Getachew T. Alemu
Getachew T. Alemu is an independent business development consultant. He was formerly an OP-ED Editor at Fortune. He can be contacted at

Published on May 16,2017 [ Vol 18 ,No 889]



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