Light Manufacturing: Is It Light to Realise?

Izumi Ohno (Prof.) and Kenichi Ohno (Prof.), of the National Graduate Institute for Policy Studies (GRIPS),led the 13th round of policy dialogue between Japan and Ethiopia in Addis Abeba, held from February 24 to February 27, 2014. The dialogue focused on Ethiopia’s industrialisation strategy and its desire to embrace light manufacturing. The couple, who have been married for 20 years, believe that with the policy directions put forward by the incumbent government, Ethiopia can reach a stage where industrial growth is faster than agricultural growth, helping redundant labour move from rural areas to urban areas, where there will be manufacturing - as has been the case in Asia. For this to happen, however, they argue that Ethiopia must extricate itself from the current complicated business environment. Bureaucratic red-tape and a lack of coordination between the various governmental bodies must also be avoided, according to them. Izumi Ohno is a graduate of economics and development policy from Princeton University, in New Jersey, United States. She, then, graduated in economics and international relations from Tsuda College in Tokyo, Japan.She has been a professor at the Development Forum Project of the GRIPS since January, 2002. Kenichi Ohno (Prof.) has a Doctorate Degree in economics from Stanford University, United States. He has specialised in development economics, industrial policy, exchange rate management, financial integration and development policy regimes in East Asia. From 2003 to present, he has been research director at the Vietnam Development Forum based in Hanoi and Tokyo. In this interview, with BINYAM ALEMAYEHU, EDITOR-IN-CHIEF, Kenichi Ohno and Izumi Ohno discuss the overriding concerns of the dialogue, particularly focusing on the prospects of light manufacturing for Ethiopia’s structural transformation to industry.

FORTUNE: Prime Minister Hailemariam Desalegn clearly stated during the Ethiopia Policy Dialogue Forum on Industrial Development, held in Addis Abeba, from February 24 to February 27, 2014, that Ethiopia should become the leader of African light manufacturing by 2015. How is that possible, considering the numerous binding constraints to light manufacturing, such as input cost and quality, industrial land, finance, trade logistics, entrepreneurial capacity and worker skills?

Izumi Ohno: We believe that setting a target is very important. Right now, there are some changes in the global business environment, because emerging countries in Asia and the Middle East, such as India, China and Malaysia, are witnessing a rise in their labour costs. Businesses are, thus, shifting to other countries, including Ethiopia, which have comparative advantages.

There is already an accumulation. An industrial base has been built. With this base at hand, Ethiopia can continuously work on other elements, like the creation of industrial zones and general productivity.

Q:The World Bank’s former Chief Economist and senior vice president for Development Economy, Justin Yifu Lin, says light manufacturing can offer a viable path for Ethiopia and other Sub-Saharan African countries as they transform their economic structure and strive for productive job creation. But a glance at the Ethiopian situation reveals that, because of both a low skills base and poor work culture, labour productivity remains rather low.What is your input on this?

Kenichi Ohno: Ethiopia is now at an early stage. It needs to improve little by little. But Kaizen [A Japanese system of continuous improvement in quality, technology, processes, company culture, productivity, safety and leadership]can help this. Also the good management practices, such as strategic management and logistics, can improve productivity.

But none of this can be done overnight. Kaizen may help to improve Ethiopia’s factories in six months or a little over that. If the factories stop their efforts, they would only go back to where they were at the beginning.

On the other hand, keeping wages attractive is also important. One crucial thing is to make sure that wages will rise, but only to the same extent as labour productivity.So, if productivity rises by five percent, a wage increase of five percent is possible, without losing competitiveness.

There should be a social compact between government, labour and management. The three should make the utmost effort to improve productivity. If growth occurs, then the fruits should be shared between consumers, workers and companies. Government does not have to share.

Then for 10 or 20 years, a nation can keep its advantage. If it improves its quality and delivery, then, from the outside, Ethiopia looks the cheapest place to produce, with quality improving and the delivery being reliable. This helps Ethiopia move faster towards industrialisation.

Q: The Ethiopian government is confident that the nation can achieve industrialisation through establishing a direct link between agriculture and industry. Its opponents, however, contend that the idea of industrialising a nation, whose economy is based on largely subsistent and rain-fed smallholder agriculture is a nightmare. Can surplus be expected from such an economy to such a level that it feeds the industry?

Kenichi Ohno:Agricultural productivity must increase, but at the same time industrial development must grow.  If this growth is faster than agricultural growth, then,redundant labour should move from rural areas to urban areas, where there is manufacturing.  This is a very standard pattern of growth in Asia.

There is a shift from agriculture to industry. As long as industry grows, it continues to attract labour. But at some point labour shortage occurs. That is the turning point of development. Then people must invest in skills and technology. You cannot just use cheap unskilled labour.

But to make this happen, a nation must continue to attract foreign direct investment (FDI).Improving the domestic industry is very important, but to have volume and speed we need FDI.

FDI is already coming. For instance, many Turkish companies are relocating from Turkey because wages are too high. Similarly, India, Korea, Taiwan, China are beginning to come.

This is phase one and I am beginning to see this phase in Ethiopia. The government must continue to accept labour-intensive light manufacturing FDI.

Izumi Ohno: I see that Ethiopia has made a lot of progress in agriculture. The extension service on the ground all over the country is admirable. This is, thus, a good start, although more needs to be done. For improved products, the domestic supply chain has to be improved. These industry linkages with agriculture should contribute to greater productivity, quality and delivery.

Q: Ethiopia’s industrial policy and strategy of 2004 is more focused on heavy agro-industry. It does not have much room for light manufacturing. Did you see any policy support or initiative on the part of the Ethiopian government officials you met duringthe dialogue?

Kenichi Ohno:We have come to understand that the government has plans for expediting the manufacturing industry, particularly light manufacturing. So there is a kind of shift towards industrialisation.

I see an evolution of policy. Although the Agriculture-led Development Industrialisation (ADLI) is always there as part of the big picture, the content is shifting. When it was created back in the 1990s, the ADLI was designed to help agriculture grow and supply materials to the industry. It was meant to trigger industry and export.

In the time of the Plan for Accelerated & Sustained Development to End Poverty (PASDEP), however, the Ethiopian government came to understand that agriculture alone is not enough and that the nation needs specific industrial policy and industrial zones, as well as Micro & Small Enterprises (MSEs) not necessarily connected to rural agriculture. So, the government broadened agriculture. Then FDI started flowing in. The government, as far as I can see, is not bound by agricultural-linked industrialisation.  They are happy to expand industrial zones. They are also happy to take chemicals and pharmaceuticals.

During the Second PRSP period, the Ethiopian government wanted to increase the share of industry. But it did not succeed.

The Growth & Transformation Plan (GTP) was meant to increase this ratio, but still it has not really succeeded in accelerating industrialisation. My hope and expectation is that, during the next GTP period, a big FDI will start to come and this ratio will begin to change.

But that is not because domestic Ethiopian industry is becoming efficient, but rather because FDI is changing the export structure. The government has to use FDI as a driving force of industrialisation in the next five to 10 years.

Q: Is the policy shift enough to bring about the desired change in manufacturing?

Kenichi Ohno: The policy shift is reasonable and I really do not have any problem or reservations. Where I see a deficiency is with the commitment or implementation capacity, which is so low. With limited capacity, the government is moving around trying to achieve so many things at the same time.

We can take the Micro & Small Enterprises (MSEs) policy. I think Ethiopia has a good policy in this direction but it is still fragmented. The government wants to create jobs in the rural areas.

That is fine but it also needs to improve the industrial MSEs in the urban areas too. I do not think Ethiopia has a very good policy there.

There are admittedly several export promotion initiatives. Such institutes as Leather Industry Development Institute (LIDI), Textile Industry Development Institute (TIDI) and others are doing export facilitations. However, there is no central core of implementation and there are duplications.

Thus, there needs to be one focal point for export promotion. The Ethiopian Investment Agency (EIA) still needs to go a long way with the investment administration.

More generally, the business environment is still complicated. It is marred by bureaucratic red-tape. There is also lack of coordination between and among the various bodies.

Q: For light manufacturing to stand on its feet, Ethiopia must ensure that there is technical expertise. Another is micro loan provision. But both are deficient in Ethiopia. How could these challenges be met?

Kenichi Ohno: To me financial problem is ubiquitous. Even in Vietnam, it is very difficult to borrow from banks. But Vietnam is growing and has already become a lower middle-income nation.

Some countries grow despite this, as is the case with Vietnam, while others do not. Ethiopia admittedly is not very much advanced in the financial industry, even by comparison with other African countries. It has not liberalised the financial industry and that is a big factor in this. But this has to be tackled even if it takes long to do so.

In the first 10 or so years, Ethiopia should focus on training workers and I would say doing so is not very difficult. Ethiopian workers are praised for being as efficient as those of their Vietnamese counterparts.

Another level of technical expertise is whether there is production management, waste reduction, repairing, replacement and adjustment of machines. We need to build these capacities. The universities and colleges can help in this.

But for light manufacturing you need more unskilled workers than skilled ones. It is during the assembly stage that we need more technicians. So that is probably after 2025.  At this time what is more important is management capability.

Q: Ethiopia and Japan have a lot in common. One of these is sharing monarchical type of government for some time in history. Another is Japan’s unique status as maintaining its age-old culture while achieving Western type of development. But there is the China factor in the equation. I would expect you to recommend Ethiopia to follow Japan’s model but why?

Kenichi Ohno: Japan and China are different investors. They are different Overseas Development Assistance (ODA) givers. If you know what to get from Japan or China, you do not ask the wrong thing from the wrong government.

Japan is very small and slow in coming. But we want to give Ethiopia quality and a long-term perspective. China can give Ethiopia lots of funding, quick infrastructure like roads and even buildings such as the newly built AU headquarters.

Ethiopia’s quest for quick infrastructure can, thus, be better addressed by the Chinese, not us. But Japanese companies do business more carefully.

Izumi Ohno: I believe Ethiopia could combine the two, taking the good side of each. As far as Japan is concerned, however, it must be clear that first of all Japan is manufacture-oriented.

We do less and less of commercial banking or property building. We work for long-term. We are slow in coming to a new frontier. But once we come we do not leave easily, even in the face of crisis. And, most importantly, we want to train local workers.

Q: Which one of Ethiopia’s industries are prospective for light manufacturing and why?

Izumi Ohno: I would say garment because of its volume. But leather can be Ethiopia’s brand. It has such a wonderful quality and is good in design.

It could enhance Ethiopia’s image. Leather is unique to Ethiopia, although the volume may be less.

Published on March 2,2014 [ Vol 14 ,No 722]



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