The state of manufacturing in Ethiopia

27 Nov

By Belayneh Begajo*

Manufacturing industry in Ethiopia started in 1920s with a simple processing technology that produces agriculture-based products. But the sector is still infant, dominantly semi-processing, and performs at an average of nearly 43pc capacity.

For example, average capacity utilization of the textile, leather, agro-processing and pharmaceutical industries in 2009/10 was at 40pc, 10pc, 60pc and 30pc, respectively.

The manufacturing industry has neither transformed itself to high tech processing nor is competitive in the international market.Ethiopiaranked 121 out of 144 countries, according to the recent global competitiveness index.

The sector has persistently faced high production cost, severely constrained supply and poor quality raw materials and technology, both mainly imported, witnessing little improvements in the main areas of challenges over the years.

The contribution of the sector for gross domestic product (GDP) is stagnated at less than five per cent for the last 20 years. Exiting technology transfer mechanisms are poorly institutionalised.

Only four per cent of the firms inEthiopiause technology licensed from foreign companies and only four percent have ISO certification as of 2006, as compared to the 12pc in sub-SaharanAfrica. As a result, about 80pc of the national exports are agricultural, while manufacturing accounts about 10pc, which in terms of value is only about 0.5pc of the total export.

Under the Growth & Transformation Plan (GTP), the government envisions to create a foundation for the industrial sector to take a leading role in the economy. But the manufacturing industry is still struggling with the same challenges that gripped it for decades.

Inadequate and poor quality imported raw materials and technologies, along with low level of technical skills, top the lists of the problems facing the sector. Series of surveys conducted by the Central Statistical Agency (CSA) on the manufacturing sector consistently reported that more than 50pc of firms claim that their first major reason for their low capacity utilization is inadequate and poor quality raw materials.

The average cost ratio of imported to total consumed raw material was 70 pc for chemical industries, 92pc for rubber and plastics, 80pc for basic iron and steel, 85pc for fabricated metals, and 60pc for paper. It rightly shows the significance of imported industrial raw materials to the growth of the manufacturing sector.

Eventually, most of the raw materials and technologies are imported in uncompetitive manner, resulting in high investment and production costs. The total value of imported raw materials consumed by major manufacturing industries in 2009/10 was about 10.2 billon Br, according to the CSA, while the value of machineries and equipments imported in 2010/11 was about 36.7 billion Br.

It is not only the sheer volume and value of the industrial imports that justifies how the marketing and procurement of these products should be rethought but also the big difference in quality and prices across these products, and its implication on the sector’s growth.

The differences in prices and qualities of imported raw materials and technologies along with inadequate supply makes investment challenges in the manufacturing sector all the more complicated. It all looks daunting when seen along with the poor human resource base of the local market, the unfortunate negotiation power of individual investors in the international market, and the rampant information asymmetry prevalent in the global market place for imported raw materials and technology.

The immediate consequences of these challenges in the industry is low local investment, low productivity, weak international competitiveness, weak technology transfer, low capacity utilisation, high investment and production costs, and slow progress in the industrialization.

True, Ethiopia has a long tradition of generating its own indigenous solutions for various problems it faced in its history. The recent case in point is the Ethiopian Commodity Exchange (ECX), indigenous to Ethiopia in its forms and purposes, aimed to transform the agricultural marketing systems of the country and to facilitate the economic growth of the country. The astonishing growth and achievements of the ECX over the last five years of its performance has received wide global recognitions.

These types of institutional innovations should be encouraged to continue in the future so that the country could quickly depart from its inefficient past and move to a new and dynamic institutional arrangements that are more efficient, effective, sustainable, transparent and impactful.

By way of learning from ECX, I believe that an institutional solution could solve the persistent challenges facing the Ethiopian manufacturing sector, which is envisioned to play a critical role in the country’s economy, now growing at the fastest rate ever to hit middle income level in 2020. Cognisant of the many challenges the sector bears, what is most needed is an institutional marketing arrangement that will transform the manufacturing sector to a highest level of performance by addressing such the challenges in an efficient and cost-effective way.

The solution could be dubbed an Incorporated Intermediary Import Service Solution (IIISS). It involves effective intermediation of imports through integrated identification of suppliers, bulk purchase, effective price negotiation, swift transaction management and enhanced revenue and customs services.

The solution could create economic efficiency by addressing information and technical constraints of investors, on the imported raw materials and technology, and sustain the availability of the same with fair prices and best quality. It could ensure the collective bargaining powers of the industry on prices and qualities, save foreign currency by making the international procurement process more competitive and transparent, and increase the confidence of investors to prefer investing more in productive sector such as manufacturing etc.

Certainly, the solution could also have a wider positive impact on other functions of the economic system, such as logistics and transport, financial services, customs and revenue.

Surely, the feasibility of the solution will be based on two key verifiable indictors; the challenge of finding industrial raw materials and technology supplies at competitive price with best quality and the heavy reliance of the Ethiopian manufacturing sector on it.

Even then, the solution is practically simple but expected to have a profound impact on the sector and the wider economy if it is institutionalised. After all, experiences in different countries rightly show that integration is the best way to solve systemic problems in the manufacturing sector.

(Source: Addis Fortune)

*Belayneh Begajo is an economist and managing director of Bizinfo Consultancy.

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