Transcript Status of industrial sector (cont.)

Ethiopia
Why has the industrial sector
stagnated for long?
Policy explanations
Berihu Assefa
DOC09010
Ethiopian Development Research Institute (EDRI)
July 2010
In this presentation….
•
Preview of the Ethiopian economy
•
Status of the industrial sector
•
Policy evolution, dynamics and key players
•
Analysis of 3 policy problems
•
Conclusions/suggestions
Preview of Ethiopian economy
Status of industrial sector
Value added (% of annual growth)
-20 -10
0
10
20
30
Lowess smoother: Industry Value Added (% annual growth)
1980
1990
2000
2010
year
bandwidth = .8
Source: WDI (2009)
-40
-20
0
20
40
60
Lowess smoother: Manufacturing Value Added (% annual growth)
1980
1990
2000
2010
Year
bandwidth = .8
Source: WDI (2009)
•
•
Stagnant for nearly two decades (about 12%
to GDP
Manufacturing alone about 3% to GDP
Status of industrial sector (cont.)
Average productivity (VA per worker)
Source: Results of Ethiopia Investment Climate Survey, Africa Financial and Private Sector Development, the World Bank, June 2007
•
•
First, much lower average productivity (peak value) in
Ethiopia
Second, productivity distribution among enterprises in
Ethiopia is so wide - coexistence of relatively low & high
productivity firms (i.e. absence of competition)
Status of industrial sector (cont.)
Gross fixed capital formation, private sector (% GDP)
Source: Results of Ethiopia Investment Climate Survey, Africa Financial and Private Sector Development, the World
Bank, June 2007. For Kenya, figures are for private investment
•
Based on this figure, Ethiopia has the lowest gross capital
formation as % of GDP (i.e. weak private sector)
Status of industrial sector (cont.)
• Ethiopia commands relatively lower TFP than all the other
countries indicated
Policy Evolution
Rural-centered Development policy (1991~)
(Farmers can produce surplus and start small cottage industries)
SDPRP (a
small
section to
industry
and trade
(No urban
economic
policy)
Agricultural Development Led
Industrialization (ADLI) (1995~)(start
linking with SMEs)
SDPRP
Food security strategy
(3 years)
Industrial
Developm
ent
strategy
(end of
2002)
PASDEP I
(2005/6~2009/10)
Master plans
PASDEP II
(2010~2015)
Key players and policy dynamics
External advice/coercion
Policy advice
from the West
(scholars, IMF,
WB, …)
Usually one
shot policy
advice ; and
such policy
advice tend to
be common to
all LDCs (with
the exception
of J.Stiglitz &
D. Rodrik)
Policy advice
from the East
(mainly Japan)
– GRIPS team
(led by Prof.
Ohno)
Policy
dialogue
with key
government
officials with
the aim of
developing
policy
making skill
and dynamic
capacity.
Supported by
concrete projects
such as factory
productivity
improvement
(Kaizen).
Why stagnant for so long?
•
Despite recent reforms in
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−
−
−
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•
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government service delivery (speedy and less
corrupt)
Better tax administration
Some consultations with investors (hearing
complaints, though not continuous discussion)
Basic infrastructure, industrial zonation
And business environment improvements, the
private sector has not responded sufficiently,
especially the manufacturing sector remains
stagnant
The question is why?
Next, policy explanations are provided
Policy explanations

3 policy problems are visible to me
a)
Rural obsession (‘traditional-trap’)
b)
Policy bias in favor of exports
c)
Egalitarian growth as an objective
Policy problems (cont.)
a) Skewed policy (“traditional-trap”)
•
Rural obsession - state resources have been
reallocated to rural sector for long (extension
packages)
•
Agriculture is almost untaxed (only negligible rent)
•
About 97% of inland tax revenue comes from the
urban area.
•
This pro-rural orientation is stated in ADLI
•
ADLI stipulates that smallholder farmers can create
wealth and are the starting point of industrialization –
is it feasible?
•
ADLI makes more sense from equity and political
support point of view
•
Theory & empirics predict that modern sector is
engine of growth – but ADLI challenges this thought
Resource flows between agriculture and industry
• Because of the dominance of the agricultural sector in poor countries, it is
evident that the capital required to finance industrial expansion (at least in
the early stages of dev’t) would have to be largely raised from agriculture
by taxation, voluntary transfer (savings), or even by forced savings
Policy problems (cont.)
a) Skewed policy (‘traditional-trap’) (cont.)
Labor productivity in agriculture
Source: Magdi M. Amin, World Bank, 2007
•
•
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Despite huge supports, agricultural productivity remains very
low: land policy, rain-fed, fragmented
Gov’t learned importance of urban sector only recently
IP drafted in 2002/3 identifying priority sectors with clear focus
on export industries – the need to generate Forex.
Policy explanations

3 policy problems are visible to me
a)
Rural obsession (‘traditional-trap’)
b)
Policy bias in favor of exports
c)
Egalitarian growth as an objective
Policy problems (cont.)
b) Policy bias in favor of exports
•
IDS clearly focuses on export industries – that’s why
support is based on export performance. In line with
the need to generate foreign exchange
•
Sectoral priority is necessary but cost is higher when
mistakes are committed (reward upgrades, new excl.)
•
A fair example is garment industry – on the list but
continuously on the decline.
•
Adding ‘product wise support’ may solve above two
problems: lowers mistakes & captures new ones
Policy bias in favor of exports
Industrial policy orientation
Export promotion
Current
system:
support
based on
export
performance
Prof. Rodrki’s
recommendati
on: Support
new activities
rather than
exports
Prof. Ohno’s
team: select a
few priorities
but make sure
to learn to
expand policy as
you develop
policy capability
My own: support
‘tradable standard
products’ rather
than exports
Import
substitution
industries
In the pipe
line:
supported by
Ohno’s team,
J. Stiglitz, D.
Rodrik
Policy problems
a)
Rural obsession (‘traditional-trap’)
b)
Policy bias in favor of exports
c)
Egalitarian growth as an objective
Policy problems (cont.)
c) Egalitarian growth as an objective
•
The EPRDF is strongly committed to egalitarian
policies.
•
Common statement from government officials:
ensuring egalitarian economic growth
•
Also found written in policy documents
•
Practical evidences include:
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•
•
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ADLI (focus on rural)policy, control of land ownership
About 64% of the government’s total budget is spent on
pro-poor sectors such as agriculture, education, health,
water, and roads (European Union 2009).
Not bad, if it were possible; however, there is trade
off between efficiency and equity
In the process of rapid industrialization, some portion
of the population may be left behind
Growth tends to produce income inequality
(historically true in many cases)
Policy problems (cont.)
c) Egalitarian growth as an objective (cont.)
•
Caring too much for equality from the
beginning leads to distortion
•
Growth may stagnate as one discourages
growth propelling entrepreneurs by income
distribution
•
Thus, the result may be low equilibrium – i.e.
too equal and stagnant society
•
Korea in the 1980s, Japan in the 1950s faced
income inequality (rural lagged behind).
•
They devised mechanisms to tackle –
movements
•
So, income inequality need to be treated as
one of the adverse effects of growth, same
way we treat congestion, crime, etc
Getting out of the “traditional-trap”
(indications for policy review)
Indicators for policy reviews
and adjustments (by PM
Meles)
It seems that government has learned that the idea that small farmers
should spearhead economic development and structural transformation is
proving difficult . How do we know that?
Aggressive promotion in the area of Expansion of large
scale farms by private investors
Rapid and aggressive efforts in the industrial sector –
policy scope widening, introducing toolkits such as
benchmarks, BPR, Kaizen, etc
Invitation of foreign experts to help policy formulation
and articulation (e.g. Prf. Ohno’s team) and others
informally
PM announced after landslide election victory last month
– he will make policy reviews soon & unveil next
September
Conclusions
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The last 5/6 years witnessed high growth (but with little
structural transformation
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Also, encouraging policy learning among authorities
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Confusion in the role of agriculture still remains; ADLI
stipulates agriculture staffed by small farmers can be engine
of growth
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ADLI (equity & political support)
However, theoretical & empirical evidence show that
manufacturing is the engine of growth
•
Conduct export promotion in a way that lowers mistakes and
incorporates dynamism (abandon losers & embrace new ones)
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To do so, introduce methods such as ‘product-wise’ support in
addition to ‘sector-wise’ support
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The future seems bright (commitment + quick learning + etc)