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The number of employments the manufacturing sector had offered slightly changed in the past years and it is virtually unchanged since 1999, standing at below 5 percent of the total employment, a new report of the World Bank (WB) asserts.
The report recommended observing the international experience about Industry Parks, reminding two out of three potential FDI do not reach operational stage in the country.
The report entitled Ethiopia Economic Update, Overcoming Constraints in Ethiopia’s Manufacturing Sector also stated that the productive performance is dominated by foreign, public owned, and older firms than domestic and private manufacturers.
Remembering the country’s ambition of transforming its economy into an industrialized economy and advancing to middle income country by 2025, the report prescribed the adoption of a policy framework that will foster development of the manufacturing sector through the use of industrial parks to attract FDI and to support small and medium enterprises (SMEs).
“Targeting SMEs is important as they are an engine for job creation and are a manifestation of a thriving and dynamic economy. But, with services and agricultural sectors contributing almost 90 percent of GDP, the Growth and Transformation Plan (GTP) has not been able to accelerate structural transformation,” the report said.
The contribution of the manufacturing sector in the GDP remained just 4.1 percent for most of the past decade. Furthermore, Ethiopia has not made significant progress in pulling labor out of agriculture and deploying it into the more productive industrial jobs.
The productivity performance of firms is heterogeneous, with foreign owned, publicly owned, and older firms that appear more productive than their domestic, private, and young counterparts. “Although labor productivity in Addis Ababa compares well with firms in peer countries with the same level of development, this appears to reflect higher capital intensity rather than more efficient production,” the WB report added.
Still, the lowest wage in Ethiopia of about USD 1,000 per worker per year enables firms to remain competitive even if firms in other countries are more productive. A key determining factor of productivity is the ability of an economy to supply the skills needed for companies to grow and to thrive, but firms in Ethiopia are in constant struggle to recruit candidates with appropriate hard (technical) and soft skills. Stating the advantage of having a more literate and trainable labor force, the report said it would not only increase productivity, but it will also make the country more attractive to international firms who seek to invest in Africa.
The report enumerated the administrative and technological barriers that need addressing to expand the manufacturing sector and jobs creating potentials of producers. The business environment which affects the performance of all firms, irrespective of their size is yet another hurdle to beat; however, certain aspects such as regulatory burden and information asymmetry may be of particular consequence to SMEs.
Access to finance is a main obstacle to SMEs as firms in Ethiopia are more likely to be credit- constrained than global companies. “There is strong evidence that lending to micro-enterprises and larger firms in Ethiopia is relatively adequate, while SMEs are left behind (the missing middle phenomenon)” the report added.
The intensity of operational constraints and entry barriers vary depending on whether firms’ size, finance source (locally or FDI-financed), and category (SMEs or industry). Tight business entry regulations and processes are consistently highlighted by the private sector as burdensome and obstructive to the entry and dynamism, it explained.
The government backed the implementation of an industrial parks (IP) development program to address efficiently the ordinary investment-climate related issues of land access, infrastructure, and logistic and customs processes, and to attract even more FDI.
Given that about half of FDI in Ethiopia cite investment climate or regulation related issues as important impediments to investment, more FDI could be attracted by addressing those constraints and furthering the IP program. Still, cumulatively, more FDI firms succeed in moving from the investment stage to the operational phase than domestic firms.
From 2008–2012, the cumulative data for all domestic, foreign and public firms trying to enter the Ethiopian market is not encouraging as just 5 percent of firms are moving from pre-implementation to operations.
Even though a one-stop shopping service is operational, its effectiveness record is tinted. Bureaucratic hurdles continue to affect project implementation along with entry obligations remaining burdensome and time consuming for investors. The above scenarios, therefore, call for further research to identify factors that facilitate the conversion of successful FDI in Ethiopia.
The report indicated, though FDI has a better conversion rate over domestic investments, there is still room for substantial improvement. “Currently, two out of three potential FDI firms do not reach operational state. Important lessons could be drawn from the IP experience around the world,” the report added.
“For instance, the performance for IPs is greatly dependent on how well they are designed, implemented and integrated into the local economy. Despite the concept of enclaves, in practice, the success of IPs comes once they are entwined with the overall economy, and the institutional capacity of the government,” the report explained.
Promoting linkages and spillovers with domestic firms and the role of services in developing value chains is key to augment productivity of firms. Thus, addressing the investment constraints firms face outside the Industrial Parks will remain a critical issue.
Developing a skilled labor force and improving the investment climate are among the main assignments that will help support the government’s dream of becoming a manufacturing powerhouse and of increasing incomes by 2025, according to the World Bank’s latest report on Ethiopia’s Economic Update. For a country that is graduating through the early stages of economic development, industrial growth is essential for a sustained, long-term growth and poverty reduction.
The structural and economic transformation that involves the reallocation of workers from the poorly productive agriculture to the more productive manufacturing sector is an important step towards the creation of better-paying jobs.
Ethiopia needs to address several challenges in order to accelerate its structural transformation and to expand significantly light manufacturing, which is vital for sustaining economic growth and development.
“Ethiopia’s skills gap and constraints related to access to land, infrastructure, trade logistics, and customs regulations in private investment have hindered the acceleration to structural transformation, unlike in East Asia, where foreign direct investment was able to capitalize on a large pool of trainable labor, enabling investors to improve productivity while benefitting from low production costs,” said Michael Geiger, Senior Country Economist.
The report forecasted that the growth will remain high in the short term while declining gradually in the medium term. It further explained that while a rising working age population will continue to support potential GDP growth, the total growth in productivity and investment are gradually expected to decline.
The document stated that the appreciated real, effective foreign exchange rate does not help competitiveness, especially in manufacturing. Many international financial institutions have recommended the government to depreciate the currency against major hard currencies to keep the inflation and investment balanced. In the past few years, the government has been devaluating the birr, stagnating the depreciation in the past couple of years.
The fourth country’s economic update of the World Bank stated that Ethiopia had appreciated the real exchange rate by 22.5 percent at the end April 2015, reaching a cumulative appreciation of 71 percent since the nominal devaluation in October 2010. The country is now appreciating its note against all currencies that are depreciating against the US dollar. This is because the birr is closely managed against the US dollar.
The report additionally said that the annual pace of nominal depreciation, however, has been stable at 5 percent in recent years. It added that there is concern that the appreciated currency may not help to improve export competitiveness much more, since exports are falling again and the government is trying to encourage a thriving manufacturing sector to develop.
“Maintaining a competitive exchange rate is an important component of maintaining external competitiveness, but its macroeconomic effects, for instance, on on import prices and inflation need to be managed closely,” the World Bank document recommended.
The deteriorating currency is one account that indicates a worsening trade deficit which was driven by weak export performance and large imports of capital goods for public investment programs.
The export of goods showed positive growth in 2013/14, but the rate remained far below the historical growth; furthermore, export growth fell into the negative territory again in the last quarter of 2014 and first quarter of 2015.
In the past three years, the country’s export market, mainly the agriculture and mining sectors, have been stagnant. As a result, the price of major hard currency sources like coffee and gold was slashed. This price fall is mentioned as a factor for the minimal export. The manufacturing sector has similarly registered a very slow growth.
The report recalled that the poverty headcount, measured by the national poverty line, fell from 38.7 percent in 2005 to 29.67 percent in 2011. Measured against the international poverty line, which is USD 1.25 per day, Ethiopia saw the second fastest rate of poverty reduction in Africa. Economic growth, particularly in agriculture, has been an important driver of the reduction over the last decade.
“Favorable weather conditions and improving terms of trade for rural producers have been the reasons for this trend. Low levels of inequality have been maintained with the Gini coefficient remaining stable at 0.30,” it explained. The strong improvements in access to basic services and rural safety nets supported to reduce the intensity of poverty.
The report stated that the recent fall in global oil prices will have a positive economic impact on the country, which is a net petroleum importer.
The growth is expected to have positive effects partly because of the declining oil prices increases disposable real income and support stronger domestic consumption. The update said, the price decline will result in a 1.8 percent reduction in the price of goods and services, bringing welfare gains for the average household, but this reduction will be larger for urban households and wealthier rural households.
The Growth and Transformation Plan seeks to transform the economy from a predominantly agrarian one to a modern and industrialized economy.
The latest plan (GTP 2015-20) provides the medium-term strategic framework that will guide the country towards accelerating GDP growth and employment creation.
The predecessor GTP I was unable to accelerate structural transformation of the economy and the share of the manufacturing sector in GDP remained stable at a rather low level. Ethiopia’s past high growth decade has been fueled by large services and agricultural sectors. The economic growth averaged 10.9 percent per year from 2003/04 to 2013/2014 compared to the regional average of 5.4 percent for sub-Saharan Africa. The services and agriculture sectors are the backbones of the economy, together accounting for almost 90 percent of GDP between 2003/04 and 2013/14.
For the same time, manufacturing’s contribution to GDP was rather stable or just above 4.1 percent of the GDP.
The manufacturing sector has grown at an average of 10.9 percent in last decade, with a similar rate of expansion as real GDP; nevertheless, it felled short of the targeted 22 percent in the GTP. In 2013/14, the three sector shares to GDP were 40.2 percent (agriculture), 45.5 percent (services), and 14.3 percent (industry). The agriculture sector still employs more than three-quarters of all workers and the pace of structural transformation has been slow.
The share of employment in agriculture is relatively unchanged between 1999 and 2005, but it then declined from 80.2 percent in 2005 to 77.3 percent in 2013. In the meantime, the largest relative gains were recorded by other services (1.3 percentage points) and construction (1.2 percentage points). Commerce registered a decline of 2.3 percentage points. The share of employment in the manufacturing sector has changed only slightly and is virtually unchanged with 4.4 and 4.7 percent of total employment between 1999 and 2013.
Agriculture, commerce, and manufacturing registered the lowest annual growth rates from 1999 to 2013, although agriculture absorbed 73 percent of the total increase in employment.
Recently, the industry sector became the highest growing sector, driven by the construction boom and expansion in the mining sub-sectors. The industrial sector’s growth rate was 18.5 percent in 2013/14. But manufacturing, which forms part of industry and is dominated by the food, beverages, leather, textiles, and apparel industries, contributed a meager 4.4 percent to GDP in 2014 and on average it grew only by 11 percent during the same period.
The manufacturing export sector is relatively small in terms of production and employment, constituting 10 percent of total export merchandise. Given that the manufacturing sector has grown at the same pace as the economy, its contribution to GDP has remained static.
The economic update stated that the country’s economy continues its strong expansion in the 2014 fiscal year, with real GDP growing by 10.3 percent. The growth was driven mainly by the services sector from the supply side, and public investment from the demand side. At the same time, inflation has remained in single digits for the last two years, thanks to the tighter monetary policy and lower international commodity prices.
However, in recent months, domestic food prices are increasing partially as a result of shortage of rainfall during the short rainy season (March-May).