GRIPS
Development Forum Report

Assisting Industrial
Transformation in Africa
Japan-Ethiopia Industrial Policy Dialogue Phase II

Japan International Cooperation Agency (JICA)GRIPS Development Forum

Edited by the GRIPS Development Forum© GRIPS Development Forum 2016
Contact:
GRIPS Development Forum
National Graduate Institute for Policy Studies
7-22-1 Roppongi, Minato-ku, Tokyo, 106-8677 Japan
Phone: 03-6439-6337
Fax: 03-6439-6010
E-mail: forum@grips.ac.jp
http://www.grips.ac.jp/fourm-e/

Assisting Industrial Transformationin Africa
Japan-Ethiopia Industrial Policy Dialogue
Phase II

Assisting Industrial Transformationin Africa
Japan-Ethiopia Industrial Policy Dialogue
Phase II

August 2016

NATIONAL GRADUATE INSTITUTE
FOR POLICY STUDIES (GRIPS)

Foreword
This volume contains industrial policy advice and supporting materials preparedby the GRIPS Development Forum (GDF) and the Japan International Cooperation
Agency (JICA) in the Second Phase of the Ethiopia-Japan Industrial Policy Dialogue(January 2012-July 2016). A Total of nine regular policy sessions were held in Addis
Ababa at three levels: with the Prime Minister, with Ministers and State Ministers,
and with officials and experts on the ground where policies were being implemented.
These included a series of High Level Forums, organized jointly by the Ethiopian Development Research Institute (EDRI) and JICA, under the chairmanship of H.E. Dr.
Newai Gebre-ab, Chief Economic Advisor to the Prime Minister and the Executive
Director of EDRI.
Besides these regular sessions, additional meetings were organized with thePrime Minister and his high-level advisors while visiting Japan, many policy letterswere exchanged with them, and eight policy research missions were dispatched tothird countries. JICA’s industrial cooperation projects, including Kaizen and a pilot for champion product creation and country branding, were conducted in parallelwith the policy dialogue. This format was basically the same as in the First Phase(June 2009-May 2011) whose records were published earlier from GDF. The present
volume contains the highlights of our policy advice at the end of the Second Phase.
Compared with the First Phase which mostly focused on general policy methods andEast Asian experiences, the Second Phase was more action-oriented and supportive of
concrete policy measures initiated by the Ethiopian government.
The Principal authors of this volume were Kenichi Ohno (GDF), Izumi Ohno
(GDF), Toru Homma (JICA), and Masaaki Hamada (JICA) in cooperation with othermembers of JICA team (Keiji Katai, Chigusa Seki, Kimiaki Jin, Kana Fukuda, Emi
Kurita, and Deresse Fekadu Nigussie). The authors would like to thank all leaders,
officials, researchers, and business people in Ethiopia, Japan, and other countries who
provided us with valuable information and views without which our advice would
have been less pertinent. Competent support of Akemi Nagashima, Mieko Iizuka, andYuka Akiyama (GDF) in preparation of this report is deeply appreciated.

Contents
ForewordContents
List of Tables
List of Figures
List of Abbreviations
Preface ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 1
About Industrial Policy Dialogue ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3
Chapter 1 Background and Overview ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 15
1-1. Policy evolution ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 15
1-2. Where Ethiopia stands ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 18
1-3. Three compelling advantages ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 22
1-4. The Flying Geese pattern ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 23
1-5. Avoiding a future middle income trap ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 26

Chapter 2 Basic Direction ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 31
2-1. FDI-led industrialization ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 31
2-2. The wage-productivity nexus ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 34
2-3. Industrial policy timeline ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 42

Chapter 3 Key Policy Components ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 55
3-1. Kaizen and national productivity movement ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 55
3-2. Industrial parks ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 58
3-3. Linkage formation ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 65
3-4. Handholding ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 72
3-5. Champion products and national branding ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 77
3-6. Improving business climate ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 81

Chapter 4 Assessing GTP II ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 91
4-1. Industrial content of GTP II ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 91
4-2. Assessment ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 95
4-3. Japanese alignment with GTP II ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 97

List of Tables
Table 1-1

World Bank's Ease of Doing Business Ranking •••••••••••••••••••••••••••••••••••• 21

Table 1-2

International Comparison of Industrial Policy Quality ••••••••••••••••••••••••••• 30

Table 2-1

Average Monthly Wage in Ethiopia •••••••••••••••••••••••••••••••••••••••••••••••••••• 38

Table 2-2

Ethiopian Manufacturing: Value-added, Employment, andLabor Productivity ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 39

Table 3-1

Industrial Zone Services Offered to Japanese Investors ••••••••••••••••••••••••• 62

Table 3-2

Ten Pledges of Ha Nam Province, Vietnam to Japanese Investors ••••••••••• 62

Table 3-3

FDI-Domestic Firm Linkage Promotion in Thailand ••••••••••••••••••••••••••••• 67

Table 3-4

Scaling Up of Core Industrial Policy Functions: A Suggestion •••••••••••••••• 77

Table 3-5

Vietnam-Japan Joint Initiative for Improving Business Climate ••••••••••••••• 88

Table 4-1

Selected GTP II Indicators Related to Industry and
Structural Transformation •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 92

List of Figures
Figure 1-1

Per Capital Income (USD, 2014) •••••••••••••••••••••••••••••••••••••••••••••••••••••••• 19

Figure 1-2

Manufacturing: Share of GDP (2014) ••••••••••••••••••••••••••••••••••••••••••••••••• 19

Figure 1-3

Cumulative FDI Inflow as of 2014 •••••••••••••••••••••••••••••••••••••••••••••••••••••• 19

Figure 1-4

Monthly Worker Wage in 2015 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 20

Figure 1-5

Structural Transformation in East Asia ••••••••••••••••••••••••••••••••••••••••••••••• 25

Figure 1-6

Stages of FDI-led Industrialization ••••••••••••••••••••••••••••••••••••••••••••••••••••• 26

Figure 1-7

Diverging Growth Paths ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 28

Figure 2-1

Five-part Industrialization Strategy for Ethiopia ••••••••••••••••••••••••••••••••••• 33

Figure 2-2

Asia: Manufacturing Labor Productivity Index ••••••••••••••••••••••••••••••••••••• 37

Figure 2-3

Asia: Worker Monthly Wage ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 37

Figure 2-4

Malaysia: Manufacturing ++ •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 44

List of Abbreviations
5S

Seiri, Seiton, Seisou, Seiketsu, Shitsuke

A.S.I.A

Alliance for Supporting Industries Association (Thailand)

ADLI

Agricultural Development Led Industrialization

AEO

Authorized Economic Operator

ASEAN

Association of Southeast Asian Nations

ASID

ASEAN Supporting Industry Database

ASYCUDA

Automated System for Customs Data

BOI

Board of Investment (Thailand)

BOT

Build Operate Transfer

BPR

Business Process Re-engineering

BSID

Bureau of Supporting Industries Development (Thailand)

BUILD

BOI Unit for Industrial Linkage Development

CDC

Council for the Development of Cambodia

CIER

Chung-Hua Institution for Economic Research

CMP

Cut-Make-Pack

CSA

Central Statistical Agency of Ethiopia

DBE

Development Bank of Ethiopia

DD

Democratic Developmentalism

DEA

Data Envelopment Analysis

DFID

Department for International Development (UK)

DPST

Domestic Private Sector Transformation

EDRI

Ethiopian Development Research Institute

EFFORT

The Endowment Fund For The Rehabilitation of Tigray

EHDA

Ethiopian Horticulture Development Agency

EIA

Ethiopian Investment Agency

EIC

Ethiopian Investment Commission

EKI

Ethiopian Kaizen InstituteEMI

Ethiopian Management Institute

EPRDF

Ethiopian People’s Revolutionary Democratic Front

ERCA

Ethiopian Revenues and Customs Authority

ETB

Ethiopian Birr

EU

European UnionFDI

Foreign Direct Investment

FeMSEDA

Federal Micro and Small Enterprise Development Agency

FY

Fiscal year

GDF

GRIPS Development ForumGDP

Gross Domestic Product

GIZ

Deutsche Gesellschaft für Internationale Zusammenarbeit

GRIPS

National Graduate Institute for Policy Studies

GTP

Growth and Transformation PlanGTP IIThe Second Growth and Transformation Plan

HLFs

High Level Forums

HR

Human Resource

ICOR

Incremental Capital-Output Ratio

ICT

Information and Communication Technology

IMF

International Monetary Fund

IoTInternet of Things

IPD

Initiative for Policy Dialogue

IPDC

Industrial Parks Development Corporation

IPP

Independent Power Producer

IPRIntellectual Property Rights

IZs

Industrial Zones

JBIC

Japan Bank for International Cooperation

JETRO

Japan External Trade Organization

JICA

Japan International Cooperation Agency

J-SMECA	Japan Small and Medium Enterprise Management Consultant
Association
KDI

Korean Development Institute

KOTRA

Korea Trade-Investment Promotion Agency

LIDI

Leather Industry Development Institute

LMEs

Large and Medium Enterprises

LPG

Liquefied Petroleum Gas

MATRADE

Malaysia External Trade Development Corporation

METEC

Metals and Engineering Corporation (Ethiopia)

METI

Ministry of Economy, Trade and Industry (Japan)

MIDI

Metals Industry Development InstituteMITI

Ministry of International Trade and Industry (Malaysia)

MLIT

Ministry of Land, Infrastructure, Transport and Tourism (Japan)

MNC

Multinational Corporation

MOA

Ministry of Agriculture

MOEA

Ministry of Economic Affairs (Taiwan)

MOF

Ministry of Finance

MOFA

Ministry of Foreign Affairs

MOFED

Ministry of Finance and Economic Development (Ethiopia)

MOI

Ministry of Industry

MOTI

Ministry of Trade and Industry (Ethiopia)

MSEs

Micro and Small Enterprises

Nor.

NominalNPC

National Planning Commission (Ethiopia)

NPOs

Nonprofit Organizations

ODA

Official Development AssistanceOEM

Original Equipment Manufacturer

OSOS

One Start One Stop

PASDEP

Plan for Accelerated and Sustained Development to End Poverty

PPSEZ

Phnom Penh Special Economic Zone

PSRC

Policy Study and Research Center

QCD

Quality, Cost and Delivery

R&D

Research and Development

RDB

Rwanda Development BoardSCORE

SME Competitiveness Rating for Enhancement (Malaysia)

SFA

Stochastic Frontier Analysis

SME Support	Organization for Small and Medium Enterprises and Regional
Innovation
SMEs

Small and Medium Enterprises

SOE

State-owned Enterprise

SPS

Sanitary and Phytosanitary

TAI

Thailand Automotive Institute

TAMA Cluster

Technology Advanced Metropolitan Area Cluster

TFP

Total Factor Productivity

TICAD

Tokyo International Conference on African Development

TIDI

Textile Industry Development Institute

TIER

Taiwan Institute of Economic Research

TNC

Transnational Corporation

TNI

Thai-Nichi Institute of Technology

TPA

Technology Promotion Association (Thailand-Japan)

TVET

Technical and Vocational Education and Training

UK

United Kingdom

UNCTAD

United Nations Conference on Trade and Development

UNDP

United Nations Development Programme

UNIDO

United Nations Industrial Development Organization

US

United States

USAID

United States Agency for International Development

USD

United States Dollar

VA

Value-added

VMC

Vendors Meet Customers

WTO

World Trade Organization

WW2

World War TwoPreface
This volume contains industrial policy advice and related materials prepared for
the Ethiopian government at the time it formulated the Second Growth and Transformation Plan 2015/16-2019/20 (GTP II). The advice and materials were extracted fromvarious forums, meetings, papers, letters, and emails which took place in the courseof Ethiopia-Japan Industrial Policy Dialogue (Preparation, 2008-2009; Phase 1, 20092011; and Phase 2, 2012-2015). Contents were selected from the viewpoint of current
relevance rather than comprehensiveness with addition, updating, and re-prioritization
where necessary. Past issues that have already been solved or become obsolete are notincluded.
During the last seven years, we have witnessed great changes in Ethiopia, a poor
African country that grew fast and is emerging as a newly industrializing economy.
Ethiopia in 2008, when we started this dialogue, and Ethiopia today are different countries not only in the physical outlook of streets and infrastructure but also in surging
foreign direct investment (FDI) and expanding policy scope in support of industrialization. This economic dynamism was primarily the result of aggressive learningand doing by the Ethiopian government. High aspiration, strong commitment, andunrelenting pragmatism of the Ethiopian policy makers from top to bottom are truly
remarkable. We praise this policy spirit as well as achievements up to the present.
Nevertheless, this is just a beginning in the long process of industrialization, andthe way ahead for Ethiopia will be challenging. Moreover, the path that Ethiopia haschosen to travel, namely, FDI-led industrialization leading to technology transfer andskills upgrading, is a familiar one for East Asia’s Flying Geese economies with wellknown risks and pitfalls. That is why we would like to conclude Phase 2 of Industrial
Policy Dialogue with this document featuring our honest and straightforward proposals and warnings from the perspective of Japanese and East Asian policy makers andanalysts. Honesty and straight talk are the attributes strongly requested by the Ethiopian dialogue partners from the start.
This volume covers a wide range of issues raised and discussed by the GRIPS
Development Forum (GDF) , the Japan International Cooperation Agency (JICA), andother members of the Ethiopia-Japan bilateral dialogue, as well as national leaders,
officials, and experts in many countries in Africa and Asia who offered us valuable
insights on industrial policy formulation and execution. We would like to thank themall. Responsibility for the content of this report however rests solely with GDF.
Tokyo, August 2016
GRIPS Development Forum
1About Industrial Policy Dialogue
How it began
In 2002, the GRIPS Development Forum (GDF) started visiting African governments in search of an ideal partner for industrial policy dialogue. In Zambia, Tanzania, Ghana, Uganda, and Mozambique, we met presidents and/or economic ministers
and permanent secretaries, did limited policy research, and engaged in mini policy
dialogue. In the summer of 2008, we were approached by JICA to attend a policy
conference in Addis Ababa. Professor Joseph Stiglitz of Columbia University, a Nobel
laureate, organized annual African Task Force meetings of the Initiative for Policy
Dialogue (IPD), and the next meeting was to be held in Ethiopia. JICA, which financially supported IPD, wanted Japan to contribute intellectually as well. We accepted
the offer because we had heard that Ethiopia was serious about industrial policy. But
we did not know that Prime Minister Meles Zenawi would attend virtually all sessionsof the two-day conference.
We explained East Asian ideas of industrialization in our session and presented
our edited book to the Prime Minister. He started to read it during the conference.
Chapter 7 of the book was JICA’s kaizen assistance in Tunisia.1 In the following
week, Prime Minister Meles invited the Japanese ambassador to his office and requested two-part cooperation from Japan—policy dialogue with GDF and kaizen by JICA.
He had heard about kaizen before but did not know that JICA was helping Africancountries to adopt it. He said, “Please do a kaizen project in Ethiopia just as you did
in Tunisia.”
In reality, Ethiopia-Japan Industrial Policy Dialogue has been conducted jointly
by GDF and JICA (not by GDF alone) at three levels: Prime Minister, Ministers andState Ministers, and officials and experts at the operational level. Policy dialogue sessions were held four times a year during Phase 1 and twice a year during Phase 2 in
Addis Ababa. Although the frequency was reduced in Phase 2, our workload was thesame or even higher because of increased research at home, letter-writing to the Prime
Minister and Ministers, and more frequent policy missions to third countries in Asia
1

Tsuyoshi Kikuchi, “The Quality and Productivity Improvement Project in Tunisia: A Comparison ofJapanese and EU Approaches,” ch.7, Diversity and Complementarity in Development Aid: East Asian
Lessons for African Growth, GRIPS Development Forum, 2008. The book was subsequently updated andpublished commercially from Routledge in 2013 with the revised title, Eastern and Western Ideas for
African Growth, where previous ch.7 was renumbered as ch.8.

3

and Africa. After Prime Minister Meles passed away in 2012, bilateral dialogue wascontinued by new Prime Minister Hailemariam Desalegn with equal zest and seriousness. We always aimed at building mutual trust, conveying most appropriate lessons
for Ethiopia from a broad selection of countries (not just from Japan), and respecting
the will and ownership of the Ethiopian government.

Modality and topics
The topics of Industrial Policy Dialogue were selected carefully each time to fit
the policy environment and the interests of the Ethiopian government, both of whichwere rapidly evolving. We refrained from setting a series of agenda a few years inadvance. We also did not want to just present our findings or recommendations; wewanted to make sure that what we discussed was closely related to what Ethiopia
planned to do, and led to actual policy formulation and improvements. The Ethiopian
government does not hesitate to revise policies or introduce new ones when it is convinced of the value of policy advice. We consider it important that Japan offers some(but not necessarily all) of the funding and/or technical expertise needed to carry out
proposed policies. This increases the chance of proper implementation as well as the
Figure 1. Industrial Policy Dialogue and Kaizen
2008

2009

2010

2011

2012

2013

PM Meles

2014

2015

2016 ∙ ∙ ∙PM Hailemariam

Industrial Policy Dialogue
Preparation

Africa Taskforce
Meeting Jul. 2008

Phase 1 (2009-11)

Official launch
Jun. 2009
JICA’sIndustrial
Cooperation

Phase 1 (2012-16)

Final session
May 2011

TICAD V

Start
Jan. 2012

PM Abe visit

Malaysia mission

Kaizen Phase 1

Kaizen Phase 3(30 pilot companies)(Advanced level)

Kaizen Phase 2(Institution & human resource)
Metal industry
surveyChampion
Products

Branding &promotion(With Germany)

Note: B lack boxes indicate three-level policy dialogue in Addis Ababa (PM, ministers, operation level).

4

incentives for both sides to seriously engage in the dialogue. Figure 1 illustrates how
Ethiopia-Japan Industrial Policy Dialogue proceeded in parallel with JICA’s industrial
cooperation, consisting of kaizen and other concrete projects, on the ground.
During 2008-2015, 19 policy discussions were held with the Prime Minister, 18High Level Forum sessions were conducted in Addis Ababa, and 15 policy research
visits to third countries in Asia and Africa by Ethiopian, Japanese, and/or other officials and researchers were organized (not counting mutual visits between Ethiopia andJapan). In addition, there were numerous visits to offices, factories, and project sites,
discussions with international organizations and other donors, regional trips inside
Ethiopia and Japan, and invited lectures.
We had 10 face-to-face policy meetings with Mr. Meles Zenawi and 11 such sessions with Mr. Hailemariam Desalegn (two of which were when he was Deputy Prime
Minister). With both Prime Ministers, discussions were direct, rich, and action-oriented with an average length of 1.5-2.0 hours each. The progress of kaizen and the agenda of High Level Forums were usually reported, but the discussion most often took
unexpected turns to new policy initiatives, hot issues at hand, or how bilateral policy
action could be accelerated. Prime Ministers sometimes wrote letters to us. In the firstyear of Phase 1, Mr. Meles sent us two long letters on the developmental philosophyof Ethiopia. He additionally requested GDF to collect English materials on various
issues related to industry or East Asia, to which we responded with six information
packages.2 Mr. Hailemariam also asked for policy research papers when we did notsend him enough. GDF wrote a total of 17 policy letters to Prime Ministers and otherhigh-level policy dialogue participants.
At the level of Ministers and State Ministers, we organized formal and well-prepared sessions called High Level Forums (HLFs) which consisted of half-day or fullday presentation and discussion in a hotel conference room. HLF agenda were agreed
1-3 months ahead of the session by picking up industrial issues with high policy relevance to the Ethiopian government. We did not choose topics years ahead because
situations and policy interests shifted very quickly in Ethiopia, and HLFs aimed atpolicy impact rather than academic merit. HLFs were usually covered in local TV andnews media. Apart from HLFs, parallel seminars were sometimes organized in the2

Information packages requested by Mr. Meles were on the Japanese TVET system, rural life improvement programs in East Asia, basic information on steel and metal processing industries, international comparison of industrial policy formulation, historical experiences of foreigner-assisted technology
transfer in Japan and Korea, and basic information on the chemical industry.

5

same day or week to discuss such specific issues as kaizen, champion product creation,and national re-branding (see Appendix Tables for High Level Forum agenda, policy
letters, and third country policy missions).

From general to specificOver the seven years, policy discussions with the Prime Ministers and at HLFs
shifted from general principles to specific policy instruments, which was just as we
had intended.
In Phase 1, broad issues were discussed such as Democratic Developmentalism(DD) and Agricultural Development Led Industrialization (ADLI), the two principal
developmental philosophies of Ethiopia, as well as how East Asian governments drafted and executed industrial policy. It was particularly instructive to hear the details of
DD and ADLI from Prime Minister Meles and clarify certain points with him, which
provided us with a firm ground for initiating concrete knowledge sharing. Transferability and adjustment of kaizen to Ethiopian soil was another issue we discussed
intensely, but deliberation on kaizen gradually moved to the operational level suchas the Ethiopian Kaizen Institute (EKI) and the Kaizen Project Coordination Committee as JICA’s kaizen cooperation took root. The Growth and Transformation Plan(a five-year plan that stressed growth and industrialization: GTP) was also discussed.
The Ethiopian government separately requested an ad hoc survey on the basic metal
and metal processing industries in Ethiopia, which was conducted in cooperation withGermany.
In Phase 2, equipped with sufficient knowledge of Ethiopian policy mindset, direction, and weaknesses, the main focus was to selectively introduce concrete policy
measures so they would be seriously considered and even actually adopted by the
Ethiopian government. It was important to choose a small number of policy measuresand produce success rather than try to cover all measures at once but superficially.
Candidate policy measures were proposed by both sides. First, to infuse an attitude
toward demand orientation and customer satisfaction (not just efficient factory operation), strategic export promotion at the macro level and champion product creation at
the micro level were proposed. Japanese, Malaysian, and Thai experts were mobilized
for this purpose. A large Ministry of Industry mission headed by a State Minister wassent to Malaysia for two weeks to study strategic FDI attraction in preparation forrevising the Investment Proclamation and Regulation. As manufacturing FDI began to6

pour into Ethiopia from Turkey, India, China, and other countries, discussion turned
to FDI-led industrialization and FDI-linked technology transfer, which are common
policy agenda in East Asia. Topics such as industrial zone development and management, labor productivity and wage, one-stop investor service, and handholding wereadded. Bringing Japanese manufacturing firms to Ethiopia, which we thought was
hardly possible a few years back, became a bilateral priority issue.

Following an East Asian path
In this way the situation surrounding the Ethiopian economy has changed fromwithin and without. Ethiopian industrial policy is evolving partly in response to shifting circumstances and partly as an autonomous driving force of economic transformation. Previously we were unsure how the idea of ADLI—using agriculture growth
to stimulate full-scale industrial growth—was to be concretized and scaled up in
Ethiopia. By now, we are convinced that FDI-led industrialization, whose possibility
became apparent several years ago in Ethiopia, will be the way to go forward for aconsiderable time in the future.
Successes up to now should be credited mainly to the strong political will andaggressive policy learning of the Ethiopian government, which is truly outstanding by
the standards of developing countries. International cooperation was also helpful but
it could not have been effective without proper policy mindset on the receiving side.
Foreigners like us and others should be humble about the size of contribution we havemade to this feat. We already know how hard the Ethiopian government worked topromote and incentivize flower growers with Dutch cooperation or to attract the firstlarge integrated textile mill from Turkey. These did not happen by free markets or“self-discovery” of private firms.3
When policy discussions reach this stage, we no longer see any substantive difference between Asia and Africa. All nations are different in policy capability as well
as social and external circumstances whether they are in Asia or Africa, so Ethiopia’ssocio-economic uniqueness itself cannot be cited as a differentiating factor. We should
recognize the fact that many Asian governments are struggling to implement policy
measures which Ethiopia has already adopted or is trying to introduce, such as the3

Proactive industrial policy of Ethiopia is documented in Arkebe Oqubay, Made in Africa: Industrial
Policy in Ethiopia, Oxford University Press, 2015. Chapter 5 is devoted to the analysis of policy-aided
development of Ethiopian floriculture.

7

high-level export coordination committee, strategic FDI and industrial zone policy,
sectoral industrial institutes, national kaizen movement, a nationwide technical andvocational education and training (TVET) system, etc. According to our assessment
based on ten policy sub-components over thirteen countries, the quality of industrial
policy of Ethiopia is superior to that of India, Vietnam, Indonesia, or Cambodia.4
This also means that Ethiopia has entered an era in which past and current growthexperiences of East Asia—both successes to emulate and failures to avoid—are more
directly relevant to its policy formulation. There is no other country on the African
Continent to which this statement applies more aptly. For this reason, our policy advice to the Ethiopian government at the end of Phase 2 of Industrial Policy Dialogue,
contained in this volume, is essentially East Asian

4

8

Kenichi Ohno, “The Quality of Industrial Policy as a Determinant of Middle Income Traps,” a paper
presented at Singapore Economic Review Conference 2015, Singapore, August 2015.

References:(Books, reports & articles related to Industrial Policy Dialogue)
Federal Democratic Republic of Ethiopia (FDRE) (2010). Growth and Transformation Plan
(GTP) 2010/11-2014/15 Volume I: Main Text. Ministry of Finance and Economic Development. November 2010 (English Translation).
FDRE (2016). Growth and Transformation Plan II (GTP II) 2015/16-2019/20 Volume I: Main
Text. National Planning Commission. May 2016 (English Translation).
GRIPS Development Forum (ed.) (2008). Diversity and Complementarity in Development Aid:
East Asian Lessons for African Growth. Tokyo: GRIPS Development Forum.
GRIPS Development Forum Secretariat for the Multi-stakeholder Discussion Group on African
Growth Support Initiative (2008). Proposal for a New African Growth Support Initiative. GRIPS Development Forum Policy Note No.5. Tokyo.
GRIPS Development Forum (ed.) (2009). Introducing KAIZEN in Africa. Tokyo: GRIPS Development Forum.
GRIPS Development Forum (ed.) (2015). Ethiopia Information Kit: For Japanese Businesses.
Tokyo: GRIPS Development Forum.
GRIPS Development Forum (ed.) (2016). Records of Ethiopia-Japan Industrial Policy Dialogue: Policy Research in Third Countries. Volume II. Tokyo: GRIPS Development
Forum.
Japan International Cooperation Agency (JICA) & GRIPS Development Forum (2011). Intellectual Partnership for Africa: Industrial Policy Dialogue between Japan and Ethiopia.
Tokyo: GRIPS Development Forum.
JICA & GRIPS Development Forum (2011). Kaizen National Movement: A Study of Quality andProductivity Improvement in Asia and Africa. Tokyo: GRIPS Development Forum.
JICA & GRIPS (2011). Handbook of National Movements for Quality and Productivity Improvement (Kaizen). Tokyo: JICA.
Kikuchi, Tsuyoshi (2008). “The Quality and Productivity Improvement Project in Tunisia: A
Comparison of Japanese and EU Approaches.” Chapter 7 in Diversity and Complementarity in Development Aid: East Asian Lessons for African Growth. pp.183-204.
Ministry of Industry, FDRE (2013, September). Ethiopian Industrial Development Strategic
Plan (2013-2025).
Ohno, Izumi & Kenichi Ohno (2012). “Dynamic Capacity Development: What Africa Can
Learn from Industrial Policy Formulation in East Asia.” In A. Norman, K. Botchwey,
H. Stein & J.E. Stiglitz (eds.). Good Growth and Governance in Africa: Rethinking
Development Strategies. pp.221-245. New York: Oxford University Press.
Ohno, Izumi & Kenichi Ohno (2013, July). “Eastern and Western Ideas for African Growth:Diversity and Complementarity in Developing Aid.” The World Financial Review, July-August, pp.40-44.

9Ohno, Kenichi (2009). The Middle Income Trap: Implications for Industrialization Strategies in
East Asia and Africa. Tokyo: GRIPS Development Forum.
Ohno, Kenichi (2013). Learning to Industrialize: From given growth to policy-aided value creation. New York: Routledge.
Ohno, Kenichi & Izumi Ohno (eds.) (2013). Eastern and Western Ideas for African Growth:Diversity and Complementarity in Development Aid. New York: Routledge.
Ohno, Kenichi (2013, December). “Policies to Overcome the Middle-income Trap.” Making
It: Industry for Development, 14, pp.18-21. United Nations Industrial Development
Organization (UNIDO).
Shimada, Go (2015). “The Economic Implications of Comprehensive Approach to Learning
on Industrial Development: A Case of Ethiopia.” In A. Norman, J.E. Stiglitz (eds.)
Industrial Policy and Economic Transformation in Africa, pp.102-122, New York: Columbia University Press.
Shimada, Go, Toru Homma and Hiromichi Murakami (2013). “Industrial Development of Africa—JICA’s Commitment at TICAD IV and its Follow-up.” Chapter 6, In H. Kato,
Inclusive and Dynamic Development in Sub-Saharan Africa, pp.173-190, Tokyo: JICA
Research Institute.

(Related Japanese papers and documents)
大野泉（2009）「東アジア的発想によるアフリカ成長戦略への貢献」『国際開発研究』
18:2, pp.129-142。
大野泉（2010）「日本の対アフリカ ODA：アジア支援の仕組みを、アフリカ仕様へ」『世界の労働』60:5, pp.56-65。
大野泉（2016）「東アジア型の発展をめざすエチオピア：アフリカ産業発展における日本の官民の役割」『世界経済評論』60:4, pp.68-75, 国際貿易投資研究所（ITI）。
大野泉・上江洲佐代子（2009）『アフリカの成長戦略をめぐる議論と日本の取り組みへの示唆：成長研究レビューと事例分析に基づく考察』GRIPS Development
Forum Discussion Paper No.18。
大野健一（2010）「途上国開発の実践」『日本経済新聞』やさしい経済学欄連載 , 2010 年
4 月 29 日～ 5 月 11 日（8 回）。
大野健一・大野泉（2012）「日本発『アジア的』国際協力のすすめ」『外交』12, pp.122127。
GRIPS 開発フォーラムアフリカ成長支援の具体化検討会事務局（2008）『新しいアフリカ成長支援イニシャティブの提言』GRIPS Development Forum Policy Note
No.4。
GRIPS 開発フォーラム（2015）『日系企業向けエチオピア投資情報：ビジネスフロン
ティアとしてのエチオピア』GRIPS 開発フォーラム。

10

GRIPS 開発フォーラム（2016）『エチオピア産業政策対話記録集：エチオピアにおける政策対話と政策調査』Volume I, GRIPS 開発フォーラム。
国際協力機構（JICA）
・政策研究大学院大学（GRIPS）（2011）『エチオピア国産業政策
対話に関する調査：最終報告書（和文概要版）』JICA。
国際協力機構（JICA）
・政策研究大学院大学（GRIPS）開発フォーラム（2011）『アフリカ開発のための知的パートナーシップ：日本とエチオピアの産業政策対話』
GRIPS 開発フォーラム。

11

Appendix Table 1. Topics Discussed at High Level Forums (Ministerial Level)<PHASE 1>
Session 1
June 2009
Session 2
Sep. 2009

Session 3
Nov. 2009

Presentations by Japan or Third Country(1) JICA’s plan for policy dialogue(2) ADLI and future directions for industrial
development”(1) Cross-cutting issues on industrial policy& East Asian policy menu(2) Organizational arrangements for industrial policy formulation(3) SME policies in Japan”(1) Designing industrial master plans: international comparison(2) Industrial policy direction of Ethiopia:
suggestions for PASDEP II(1) Basic metals and engineering industries: international comparison of policy
framework & Ethiopia’s case(1) Result of basic metal and engineering
industries firm-level study – parts conducted by MPDC and JICA

Presentations by Ethiopia(1) Evaluation of current PASDEP focusing
on industrial development and related
sectors(1) Comments and feedback by the Policy
Dialogue Steering Committee on Japanese presentations(1) Concept for the industrial chapter of
PASDEP II and the formulation plan

(1) Draft of industry sector for PASDEP II(2) Overview, contents of PASDEP II draftof chemical subsector(1) Report of kaizen training in Osaka
Session 5(2) Report of kaizen training in Chub
July 2010(3) Current status of kaizen project and institutionalization of kaizen
Session 6(1) Singapore’s experience with productivity (1) Contents of industry sector in GTP
Oct. 2010
development: internalization, scaling-up, (2) Singapore’s productivity movement
and international cooperationand lessons learned
Session 7(1) The making of high priority development (1) Organizational structure of MOI andJan. 2011
strategies: international comparison
linkage with other ministries”
Session 8(1) Ethiopia's industrialization under GTP(1) MSE development strategy of Ethiopia
May 2011(2) Achievements of Kaizen Project(2) Kaizen dissemination plan(3) Kaizen movement in Asia & Africa(3) Botswana's productivity movement(4) Taiwan: policy drive for innovationand its Implication for Ethiopia<PHASE 2> (1) Export orientation: 3 policy directions(1) Export promotion of Ethiopia
Session 1(2) Export promotion: JICA’s experience(2) Assessing Ethiopian investment andJan. 2012(3) Export promotion center in Egypt
export policies
Session 2(1) Results of champion product seminar(1) Performance of export promotion in
Aug. 2012(2) Export promotion of Malaysia
Ethiopia(3) Economic diplomacy in Thailand(2) Export promotion by foreign mission
Session 3(1) Proactive FDI policy(1) FDI inflow into Ethiopia
Jan. 2013(2) FDI policy experience of Malaysia(3) JICA’s assistance in Zambia etc.
Session 4(1) JICA’s PSD assistance in Indonesia(1) Malaysia’s strategic FDI policyJul. 2013(2) FDI-linked technology transfer(2) Revision of Investment Proclamation
Session 5(1) International comparison of manufactur- (1) Sectoral institutes: roles & performanceing performance(2) Kaizen in GTP II and long-term visionFeb. 2014(2) Handholding programs
Session 6(1) FDI-led industrialization in East Asia
(1) Proposal for key ideas in GTP II
Aug. 2014(2) FDI inflow into latecomer Asia
(2) Current status of Ethiopian FDI
Session 7(1) Modality & key points of Japanese-run (1) Productivity & competitiveness chapter, industry chapter & kaizen in GTP II
Jan. 2015
industrial zones in Vietnam & Thailand(2) 
Industrial zones & foreign currency issues in Myanmar & India
Session 8(1) Remaining industrial issues ahead(1) Discussion on GTP II draft
Oct. 2015(2) Industrial zone experience in Cambodia (2) Ethiopian wage & labor productivity
surveySession 9(1) Japan’s alignment to Industrial objec- (1) Macro issues related to GTP II
tives of GTP II(2) Industrial Policy of GTP II
Jul. 2016(3) Hawassa Industrial Park
(Preparatory)
Session 4
Mar. 201012

Appendix Table 2. Policy Letters(Letters exchanged with high-level leaders; those with substantive policy content only)No.

PHASE 11

Date

June 9, 2009 From PM Meles

Pages

16

2 July 27, 2009 To PM Meles

9

3 July 30, 2009 From PM Meles

6

4 Nov. 16, 2009 To PM Meles

3

5 July 13, 2010 To PM MelesTo Minister of In6 Oct. 29, 2010
dustry Mekonnen
To Minister of In7 Dec. 27, 2010
dustry Mekonnen
From PM Haile8 Apr. 30, 2013
mariam95
8--

9 May 27, 2013 To PM Hailemariam

8

10 Aug. 11, 2013 To PM Hailemariam
To high-level par11 Aug. 11, 2013
ticipants of IPD

10

12 Sep. 2, 2013

PHASE 2To/from

From PMmariamHaile-

7
5

13 Dec. 24, 2013 To PM Hailemariam

4

14 Apr. 28, 2014 To PM Hailemariam

11

To high-level participants of IPD
To PM Economic
16 Jan. 26, 2015
Advisor Dr. Arkebe
15 Sep. 29, 201417
5

17 Mar. 27, 2015 To PM Hailemariam

18

18 Nov. 13, 2015 To PM Hailemariam

919 Jun. 6, 2016 To PM Hailemariam

8

20 Jul. 15, 2016 To PM Hailemariam

3

21 Jul. 29, 2016 To PM Hailemariam

6

Main topics
Democratic Developmentalism (DD) & Agricultural Development Led Industrialization (ADLI)
Agriculture, import-substitution, ADLI
Agriculture, proto-industrialization, import substitution, ADLI
Master plan structure, energizing private sector,
proactive industrial policy
Kaizen, metal industry, MSEs
Formulation of GTP; report on high-level discussion
Response to the question on how to cope with
export firms that do not fulfill their targets
Request for meeting in Yokohama (TICAD V) regarding GTP2 & kaizen, via Japanese Embassy
Kaizen, GTP2, planning mechanism, think tank(response to PM's inquiry)
Vision & industrial strategy in GTP2
Comments on the draft report on Ethiopian Industrial Development
Response to Aug. 11 letter; light manufacturingvision, Planning Commission, CompetitivenessCouncil, etc.
Light manufacturing vision, FDI data problem,
export promotion
Data analysis & key issues of large inflow ofmanufacturing FDI from the viewpoint of East
Asia; kaizen, handholding
Issues related to industry, productivity & competitiveness (input to GTP2)Concrete conditions & requests for inviting Japanese firms (based on bilateral discussion)Comprehensive discussion on industrial issues
in GTP2
Progress in Japanese Investment Area, remarks
on latest GTP2 draft, future of Industrial Policy
Dialogue
Assessment of GTP2, Japan’s alignment with
GTP2, Japan’s industrial cooperation
SME policy documents of Japan, Taiwan and
Malaysia attached and explained
Proposing schematic presentation of core industrial components of GTP2

Note: It has been customary to copy policy letters to high-level participants in Industrial Policy Dialogue.
Page numbers include tables, figures, and appendices. Apart from the correspondence in the table,
shorter letters were sent from GDF to PM Meles on July 6 and Dec. 2, 2009.

13

Appendix Table 3. Third Country Policy Mission(Missions that produced inputs to Industrial Policy Dialogue)
No.

Date

Country

Participating
Officials & experts
Total

1

0

1

0

Current status of national productivity
movement

Aug/Sep.
Singapore
2010

9

1

4

4

National productivity movement, FDI policy, SME policy, Nanyang Polytechnic

3 Oct. 2010 Tanzania

2

0

2

0

East African Community (Arusha), MOI &industrial policy

4 Nov. 2010

Korea

5

1

2

2

Industrial policy, SME policy, ODA strategy

5 Jan. 2011

Burkina
Faso

1

0

1

0

Current status of national productivity
movement (follow-up of Nov. 2009 mission)

6 Feb. 2011 Botswana

1

1

0

0

Current status of national productivity
movement

7 Mar. 2011

Taiwan5

1

2

2Technology & RD, science parks & EPZs,
SME policy

8 Aug. 2012

Ghana

8

0

8

0

African Center for Economic Transformation (ACET), industrial & finance policy

9 Sep. 2012

India

3

0

3

0

National Manuf. Policy, industrial corridor, kaizen

10 Oct. 2012 Mauritius

3

0

3

0

EPZ & FDI policy, garment & sugar sectors, export promotion, SMEs & HR, kaizen, policy coordination

11 June 2013 Malaysia

16

11

5

0

FDI, export & industrial park policies as amodel for Ethiopia; National Transformation Strategy

12 June 2014 Indonesia

5

0

3

2

Development planning, policy coordination, new industrial policy, FDI policy, private efforts

13 Aug. 2014 Rwanda

6

0

6

0

Development planning, Rwanda Development Board, industrial HR, ICT, SEZ

14 May 2015 Thailand

3

0

3

0

FDI-local firm matching & linkage policy

15 May 2015 Cambodia

3

0

3

0

Collective policy formulation, new industrial dev. policy, FDI & SEZ policy under
CDC, Sihanoukville

Total participants

71

15

46

10

2

PHASE 1

Purpose (other than studying policy formulation & organization)

BurkinaFaso

1 Nov. 2009

PHASE 2Ethio- JapaOther
pian nese

Note: As a common topic, most of the policy missions examined industrial policy formulation and implementation including policy procedure and organization. Total number of participants includes
double-counting of same individuals. In parallel with Ethiopia-Japan Industrial Policy Dialogue,industrial policies of Vietnam and Mozambique were also studied intensively on other budgets.

14

Chapter 1

Background and Overview
1-1. Policy evolution
One striking feature of Ethiopian economic landscape is dynamic change in socio-economic situations as well as evolving industrial policy at a speed not frequently
observed in other developing countries.
Over the last two-and-half decades under the rule of the Ethiopian People’s Revolutionary Democratic Front (EPRDF), national priorities shifted gradually from building of a new nation to the pursuit of industrial excellence. In 1991, when the previous
Derg regime was toppled by military force, first tasks of the interim government were
restoration of peace and stability, creation of a federal state, drafting of a new constitution, resuscitation of the suppressed private sector, and re-connecting with the outside
world for aid and support. Internal political competition, a separation war with Eritrea,
and famine and hunger pestered the country. According to Former Prime Minister
Meles Zenawi, it was only about 2002-2003 when the Ethiopian government felt thatthese problems were largely under control and that time had come to turn its main
attention to economic development.
Industrial policy also evolved from elementary to more sophisticated. In the
1990s the government prepared developmental ideas but it was unable to put theminto concrete practice. Between 1992 and 1994 the concept of Agricultural Development Led Industrialization (ADLI), which looked to agricultural growth as an initiatorof structural transformation and a catalyst for full-fledged industrialization, was formulated. From 1995, ADLI served as a key guiding principle for a series of national
development plans. Ever since, the Ethiopian government has never abandoned thenotion that industrialization must be accompanied by robust agricultural growth.
At the same time, policy makers realized that a strategy of targeting smallholder
agriculture in rural areas alone was insufficient to accelerate industrialization. Hopedfor results such as crop diversification, productivity breakthrough, and structural transformation did not visibly occur. In the mid-2000s, the scope of ADLI was considerably
broadened to include large-scale commercial agriculture, micro and small enterprisedevelopment, large and medium manufacturing, import substitution, and foreign di15

CHAPTER 1

rect investment (FDI) attraction.1 The industrial chapter of Growth and Transformation Plan (GTP) 2010/11-2014/15 aimed at strengthening large and medium enterprises in eight selected sub-sectors as well as micro and small enterprises (MSEs), andpromoting both export and import-substituting industries.
Meanwhile, from around 2009, Ethiopia began to receive export-oriented labor-intensive manufacturing FDI. Arrival of a large integrated textile mill from Turkey was followed by other garment and footwear investments. By now Ethiopia has
emerged as a favored destination of light manufacturing processes migrating fromcountries where labor cost has become too high. To seize this historical opportunity,
the government introduced additional policy initiatives. FDI law and regulation wererevised, FDI administration was brought to a higher level, the FDI policy mechanism
was centralized and strengthened, industrial zones were created, and one-stop investor
services began to be prepared.
Another prominent feature of Ethiopian industrial policy is East Asian orientation
with strong country ownership. Ethiopia flatly rejects economic neo-liberalism of the
Washington institutions, and spends significant time and energy on learning policies
from the Orient as well as from Western scholars advocating policy activism. The
United Nations Industrial Development Organization (UNIDO), the United Nations
Development Programme (UNDP), Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), Italy, and the United States Agency for International Development(USAID) were the donors implementing visible industrial support projects in Ethiopia
in 2008, when our policy dialogue began. By now, virtually all development partners—even those with little practical knowledge on the ground—want to participate in
the industrial support for Ethiopia. Ethiopia also mobilizes academic research to justify what it does or intends to do. Mr. Meles read economic literature widely, and Mr.
Hailemariam is also an avid reader. They consulted renowned foreign economists via
meetings, conferences, books and monographs, and even emails. Mr. Meles and Dr.
Arkebe, Economic Advisor to the Prime Minister, themselves wrote research books
and articles.2 Mr. Meles once sent young officials to the Korea Development Institute
1

2

16

These “new” elements were already mentioned in the earlier official documents such as An Economic
Development Strategy for Ethiopia (1994) and Ethiopian Industrial Development Strategy (2002). But
actual implementation of ADLI up to the mid-2000s emphasized support for smallholder agriculture.
Meles Zenawi, “States and Markets: Neoliberal Limitations and the Case for a Developmental State,”ch.5, A. Norman, K. Botchwey, H. Stein, and J. E. Stiglitz, eds, Good Growth and Governance in Africa: Rethinking Development Strategies, Initiatives for Policy Dialogue Series, Oxford University Press,
2012; Arkebe Oqubay, Made in Africa: Industrial Policy in Ethiopia, Oxford University Press, 2015.

Background and Overview(KDI) School in Seoul to absorb the Korean way. From 2008, regular Industrial Policy
Dialogue with Japan has been conducted.
In GTP II, a vision of “Becoming a leading nation in light manufacturing in Africa in particular and in manufacturing in general” has been added to the national
visions. This bold statement reflects Ethiopia’s aspiration to become the most favoredhost country of light manufacturing on the Continent. According to Prime Minister
Hailemariam, this vision should be interpreted in three parts: by 2025, (i) Ethiopia
will be No.1 in Africa in light manufacturing; (ii) Ethiopia will be one of the leading
countries in Africa in manufacturing; and (iii) while light manufacturing is highlighted, heavy and/or import substitution industries with large domestic demand will also
be promoted. We strongly agree with and support this vision.
To pursue this light manufacturing vision, verifiable performance criteria for “aleading nation in Africa” will become necessary. We propose three-way measurementof Ethiopia’s industrial performance—by macro and sectoral numbers, champion
products, and industrial human resource. GTP II is expected to carry macro and sectoral targets for 2019/2020 such as the share of manufacturing reaching 8% of Gross
Domestic Product (GDP) (currently 4.6%) and manufacturing employment of 750,000(currently 380,000). These numbers were reduced from those discussed earlier, andwe do not know at the time of this writing whether the targeted manufacturing shareof export (20%) will be retained in the final version. At any rate, these are reasonabletargets and we even suspect attainment of some of these numbers ahead of time—ifpolicy evolution continues in the right direction.
Additionally, Ethiopia should take aim at production of one or two high-quality industrial products (including agro-processed products) with high domestic value and strong global demand. Korea has smart phones, Taiwan excels in electronic
components and assembly, and Thailand exports eco-cars, pickup trucks, and theircomponents. At first a global product may be a foreign-brand product (e.g. OriginalEquipment Manufacturing (OEM) garment and footwear or Rift Valley Wine produced by Castel). But over time, Ethiopia should learn value creation so it can produce
Made-in-Ethiopia goods with domestic brands. This may be world premium coffee,
high-end fashion garment with ethnic design, electronic components, or any otheritems. Champion products are not naturally emerging; they are created by deliberate
and persistent joint effort by businesses and government.
Another way to prove industrial excellence is through mind-resetting, training,17

CHAPTER 1

and mobilizing Ethiopian people—managers, engineers, technicians, and workers.
Kaizen is already started, and other policy components should be added. Creation of
excellent industrial human resource must be backed by national passion and movement, ambitious but realistic targets, globally competitive standards and supporting
institutions, matching labor skills with industrial needs, and incentivizing people tostay and improve in their trained fields. When macro-level targets are met throughhigh performance of Ethiopian products and industrial labor, instead of just FDI’s
activities, Ethiopian industrialization becomes a genuine one. But for this, Ethiopia
needs additional policy learning.

1-2. Where Ethiopia stands
Ethiopia is rising fast in per capita income, infrastructure, FDI attraction, manufactured export, policy aspiration, and popular expectation. With new industrial zones,
a divided three-lane expressway, new railway lines, construction boom, aggressive
expansion of Ethiopian Airlines, flower export, and French wine and strawberry production, any visitor will sense the energy and determination driving this nation, andbelieve this poor African country will not be so poor in the next five to ten years. But
Ethiopia’s starting point was very low and high growth up to now has not removed all
barriers to development. It is therefore useful to check some basic statistics to ascertain where Ethiopia stands in the developing world. As a starter, Figures 1-1 and 1-2
clearly show that Ethiopia’s income and manufacturing sector are still at the bottom
range as of 2014. Also, Asian developing economies have much higher manufacturing-to-GDP ratios compared with African peers.
Regarding the cumulative stock of FDI (for all sectors), the United Nations Conference on Trade and Development (UNCTAD) Database reports Ethiopia’s stock to
be $7.3 billion as of 2014, while FDI data for 1992-2013 made available to us by
Ethiopian Investment Agency (EIA) (now Ethiopian Investment Commission: EIC)
add up to 411 billion birr—or about $23 billion at the average exchange rate of 18 birr
= $1. The wide gap between the two sources may reflect the difference between operational versus registered FDI. Moreover, we believe the quality and consistency of both
sources need to be improved significantly. At any rate, they give us at least a roughmagnitude of FDI inflows into Ethiopia. Using the UNCTAD data, Figure 1-3 compares Ethiopia’s cumulative FDI with other African and Asian nations. Ethiopia has
a long way to go to before joining the club of major receivers of manufacturing FDI.
18

0

250

200

150

100

50
Ghana
Ghana

Nigeria
Nigeria

Kenya
Kenya

SouthAfrica
AfricaSouth

SenegalSenegalCambodia
Cambodia

India
India

Bangladesh
Bangladesh

Philippines
Philippines

Indonesia
Indonesia

Senegal

Laos
Ethiopia
Ethiopia

RwandaRwandaFigure 1-3. Cumulative FDI Inflow as of 2014

Botswana

USD billion
300
Note: China ($2.64 trillion) is out of range.
Tanzania
Tanzania

Source: See Figure 1-1.

Kenya

Ethiopia

Côte d'lvoire

Bangladesh

UgandaSri Lanka

CambodiaZambiaTanzania

Myanmar

Ghana

Mozambique

Philippines

Nigeria

Vietnam

Malaysia

Malaysia
Malaysia(%)(%)

Thailand

India

35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
ThailandThailand

Ethiopia
Ethiopia

Mozambique
Mozambique

RwandaRwandaUgandaUgandaTanzania
Tanzania

SenegalSenegalCambodia
Cambodia

Bangladesh
Bangladesh

Myanmar
Myanmar

Kenya
Kenya

Ghana
Ghana

India
India

ZambiaZambiaPhilippines
Philippines

Nigeria
Nigeria

Indonesia
Indonesia

Thailana
ThailanaSouthAfrica
Africa
South

China
China

Malaysia
Malaysia

12,00012,00010,00010,000
8,000
8,000
6,000
6,000
4,000
4,000
2,000
2,000
0
0

Indonesia

Background and Overview

Figure 1-1. Per Capita Income (USD, 2014)

Source: World Bank, World Development Indicator database, accessed Sep.14, 2015.

Figure 1-2. Manufacturing: Share of GDP (2014)

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics).

19

CHAPTER 1

Regarding monthly wage, unskilled manufacturing wages of China, Malaysia, India, and Thailand are already above $300 as reported in Figure 1-4. At this wage level,no new labor-intensive manufacturing FDI will come, and existing ones start leaving.
In fact, many of these countries have an explicit policy to shift to high technology bydiscouraging simple manufacturing. Monthly wages in Indonesia and Philippines areapproaching $300 and Vietnam’s urban wage is close to $200. At this wage level,
existing labor-intensive processes can stay but not for very long. Wages in Myanmar,
Cambodia, and Bangladesh are lower and still suitable for light manufacturing, butthey are also on upward trends. In recent several years wages are rising particularly
fast in Indonesia, Vietnam, and Cambodia at double digits and sometimes even exceeding 20% annually, while their labor productivity growth is in the range of 2-5%
per year only. They are quickly losing labor competitiveness which is a big headachefor domestic and foreign investors alike and worries policy makers.
Ethiopia’s manufacturing wage is often said to be about $50 per month, which iscompetitive enough to attract labor-intensive FDI. A recent JICA-commissioned survey by Addis Ababa University researchers (see footnote to Figure 1-4) shows that the
Figure 1-4. Monthly Worker Wage in 2015
0

200

400

600

800

1,000

1,200

1,400

1,600

(USD/month)
1,800
2,000

Hong Kong (Hong Kong)
Korea (Seoul)
Singapore (Singapore)
Taiwan (Taipei)
China (Beijing)
Malaysia (Kuala Lumpur)
India (New Delhi)
Thailand (Bangkok)
Philippines (Manila)
Indonesia (Jakarta)
Vietnam (Hanoi)
Myanmar (Yangon)
Cambodia (Phnom Penh)
Bangladesh (Dhaka)
Ethiopia (leather worker)$105

Ethiopia (textile worker)$94

Ethiopia (ﬂower worker)$39

Sources: JETRO Annual Survey on Comparison of Investment-related Costs among Major Cities andAreas in Asia, 2015; for Ethiopian data, Ethiopian Inclusive Financial Training and ResearchInstitution, “Basic Empirical Research on Productivity and Wage in Ethiopia,” a JICA commissioned study, September 2015.

20

Background and Overview

current Ethiopian monthly wages, including tax and social security contributions andother benefits, are $105 for leather workers, $94 for textile workers, and $39 for flower
workers. Wage is not the only factor that attracts FDI, but it is a very important one.
If Ethiopia continues to offer reasonable wage and rising labor productivity together
with other advantages—political stability, serious policy support, improving businessclimate, good industrial zones, one-stop service, industrial skills, better connectivity,
etc.—inflow of light manufacturing FDI will surely accelerate. Otherwise, it may stallin the middle. Issues of labor productivity and wage will be revisited in later sections
as they are critically important for Ethiopia in the coming years.
One of the weakest points about Ethiopia is poor business environment. The
World Bank’s Doing Business Indicators show that Ethiopia ranks low and its relative
position is falling in recent years (currently 132nd among 189). Annual fluctuations insuch ranking should not be taken too seriously because what they measure and what
the country tries to improve may not match. But the fact remains that Ethiopia’s business environment is one of the worst even by the African standard.
Table 1-1. World Bank’s Ease of Doing Business Ranking
Singapore
Hong Kong
Korea
Malaysia
TaiwanThailand
MauritiusJapan
RwandaTunisia
MoroccoVietnam
China
Philippines
Egypt
Indonesia
Ethiopia
Cambodia
India
Bangladesh
Myanmar
Total number ofcountries & areas

2006
2
7
27
21
35
20
23
10
139
58
102
99
91
113
141
115
101
133
116
65
n.a.

2007
1
5
23
25
47
18
32
11
158
80
115
104
93
126
165
135
97
143
134
88
n.a.

2008
1
4
30
24
50
15
27
12
150
88
129
91
83
133
126
123
102
145
120
107
n.a.

2009
1
4
23
20
61
13
24
12
139
73
128
92
83
140
114
129
116
135
122
110
n.a.

2010
1
3
19
23
46
12
17
15
67
69
128
93
89
144
106
122
107
145
133
119
n.a.

2011
1
2
16
21
33
19
20
18
58
55
114
78
79
148
94
121
104
147
134
107
n.a.

2012
1
2
8
18
25
17
23
20
45
46
94
98
91
136
110
129
111
138
132
122
n.a.

2013
1
2
8
12
16
18
19
24
52
50
97
99
91
138
109
128
127
133
132
129
n.a.

2014
1
2
7
6
16
18
20
27
32
51
87
99
96
108
128
120
125
137
134
130
182

2015
1
3
5
18
19
26
28
29
46
60
71
78
90
95
112
114
132
135
142
173
177

155

175

178

181

183

183

183

185

189

189

Source: World Bank Doing Business Report 2006-2015. The survey was initiated in 2004 and began tobe published in 2006.

21

CHAPTER 1

1-3. Three compelling advantages
Regarding why FDI—especially manufacturing FDI—is attracted to some countries but not others, we have the following hypothesis derived from observations on
business conditions and industrial policies in a large number of developing and emerging economies. As a first step, compelling factors and supplementary factors should
be distinguished.
All business investments are driven primarily by profit motive, and a country must
therefore offer at least one irresistible source of business profit in order to become apreferred investment destination. Such profit sources are what we call the compelling
factors of FDI attraction, which are classified into (i) labor advantage, (ii) large and/or
growing domestic demand, and (iii) natural resources. Labor advantage is sub-divided
into the case where there is a large supply of cheap labor with reasonable quality (lowend labor advantage) and the case where excellent human capital is available even athigh cost (high-end labor advantage). If a country possesses even one of these factors,
FDI will come no matter what the other conditions (supplementary factors) may be. If
a country has two or all of these factors, the inflow of FDI will be unstoppable.
Supplementary factors are what is normally called “investment climate” (excepting labor aspects) and include (i) political stability, personal security, frequencyof crime and terrorism, and the state of corruption, (ii) policy consistency and predictability, (iii) administrative efficiency in business opening and closure, taxation,customs, cross-border trade and remittances, foreign exchange, etc.,3 (iv) power andlogistics, (v) industrial zones, factory sheds, and one-stop investor services, (vi) business finance and foreign exchange, and so on. Improvements in these areas can significantly accelerate FDI inflow if the country already has at least one compelling factor,
but cannot by themselves alone attract FDI in the absence of compelling factors. This
two-step analysis can explain why some countries with smooth business procedure receive little FDI while others with notoriously inefficient, corrupt, and even dangerous
business environment receive much.
Singapore is the global business and financial center thanks to its high-end laboradvantage. Cambodia and Bangladesh attract light manufacturing FDI due to low-end
3

22

The World Bank’s Doing Business Indicators cover 11 regulatory areas applicable to SMEs: (i) startinga business, (ii) dealing with construction permits, (iii) getting electricity, (iv) registering property, (v)getting credit, (vi) protecting minority investors, (vii) paying taxes, (viii) trading across borders, (ix)enforcing contracts, (x) resolving insolvency, and (xi) labor market regulation. These collectively cover
only part of administrative efficiency, and Doing Business country ranking should be understood as such.

Background and Overview

labor advantage despite their inferior Doing Business rankings (worse than Ethiopia).
Indonesia, also with poor business conditions, attracts many Japanese firms because it
has large domestic demand for cars and other consumer goods and services. In Vietnam, gradual loss of low-end labor advantage (wage increase) is offset by rising domestic demand. Nigeria’s attraction is oil and gas plus large domestic demand despite
its business risks. Meanwhile, Mozambique, Zambia, Angola, and Namibia attract
foreign mining interests but have no other advantage in labor or domestic demand. In
one Central Asian republic without any compelling factor, manufacturing FDI does
not arrive even though its business climate is open and friendly.
This leads to the following conclusion. Ethiopia attracts light manufacturing FDI
in great number because of its low-end labor advantage. This is the compelling reason
why Ethiopia can follow the East Asian path of FDI-led industrialization, a condition
which few other African countries share. On the other hand, Ethiopia’s supplementary
conditions are partly positive and partly negative. Political stability, strong will toindustrialize, and concrete effort in kaizen, technical and vocational education andtraining (TVET), industrial support institutes, Development Bank of Ethiopia (DBE)finance, etc. are positive aspects. But other business conditions remain poor even by
low-income country standards, such as tax and customs administration, foreign exchange control, non-global standard accounting, etc. Still other areas, such as one-stop
service, industrial zones, connectivity to Djibouti and outside world, power supply,
etc. show signs of improvement but roads ahead are still long. Ethiopia must jealously
guard its low-end labor advantage for a considerable time, while at the same timecorrect inferior business conditions as quickly as possible to take full advantage of theexisting labor advantage.

1-4. The Flying Geese pattern
Ethiopia is beginning to follow a development path similar to that of Southeast
Asia. If we look closely, of course there are different aspects unique to Ethiopia just as
there are even among Southeast Asian economies. But the key fact that manufacturing
FDI is an initial driver of industrialization and structural transformation remains thesame. Policy issues that arise from such development also overlap between Ethiopia
and East Asia. For that reason, Ethiopia can learn much from East Asia’s successes
and failures.
East Asia is unique because it has attained economic development through the23CHAPTER 1

very existence of the East Asian region as a powerful arena for policy learning, production cooperation, and business competition among its member countries, and notby the effort of each country alone. One by one, countries in different development
stages accelerated growth by participating in the dynamic production network createdby private multinational corporations. Linked by trade and investment and assisted byeconomic cooperation, an international division of labor with clear order and structure
emerged. Industrialization proceeded through geographic widening on the one handand structural deepening within each country on the other. This supply-side phenomenon is called the Flying Geese pattern, through which East Asia has become the global factory of manufactured goods. No other developing region has such a collective
growth mechanism.
For any economy in East Asia, development means jumping into this arena andbecoming one crucial link in it, receiving competitive pressure as well as cooperationfrom neighboring economies, and upgrading industrial capabilities along the technological ladder. Over time, industries are passed from advanced countries to less advanced ones through FDI, so all latecomers crave to absorb as much manufacturing
FDI as possible. What drives these countries is a nationalistic urge for industrial excellence by copying good practices of others, and not conditionalities or policy matrices
imposed by international organizations.
Figure 1-5 illustrates industry passing within the Flying Geese pattern. If we fix
a country (say, Japan), we can observe the transition of main activities along the time
axis (direction 1). If we fix a product (say, garment), we can diagonally trace shifting
production sites across countries (direction 2). If we fix a time (say, now), geographic
distribution of activities within East Asia can be explained (direction 3). While reality
is a little more complex than this, the picture can provide a first-approximation story
on how order and structure are created in the regional production network.
For long Japan was the leading bird in this configuration, but late starters such as
Korea, Taiwan, and China now beat Japan in certain high-tech and electronics sectors.
Seeing this, some say that the Flying Geese are now dead, that what we see is random
acrobatic flight. However, even with some shifting players, order and structure are stillclearly visible in East Asia—except that they are not exactly the same as before. If weallow the possibilities of overtaking and leapfrogging, we can confirm that the Flying
Geese are still alive and well. And we believe Ethiopia has just joined this production
network at the tail. The Flying Geese are expanding from Asia to Africa.
24

Background and Overview

Figure 1-5. Structural Transformation in East Asi

But there is one serious problem in East Asia. Many of the late starters seemtrapped in middle income, not reaching high income even in the long run. Figure1-6
shows the steps in catching-up industrialization initiated by FDI attraction, which istypically observed in East Asia.
From the status of monoculture, subsistence agriculture, and aid dependency(Stage 0), a latecomer begins to attract export-oriented labor-intensive manufacturing
FDI (Stage 1). At this stage the nation contributes cheap labor and land only while
foreigners control management, production, marketing, design, technology, branding,and other value-creating activities. As production volume rises, domestic supply ofmaterials and components emerges, and the nation’s industrial base widens a bit—although most value is still created by foreigners (Stage 2). Then, a critical moment
arrives when domestic citizens and firms learn value creation, master technology, andreplace foreigners. GDP rises dramatically and the nation becomes a leading exporterof high-quality goods (Stage 3). The final stage is innovation—creation of entirely
new products and services, and capturing of huge pioneers’ gain instead of copying
and perfecting what others invented (Stage 4). In this diagram, Ethiopia has just graduated from Stage 0 and entered Stage 1.
25

CHAPTER 1

Figure 1-6. Stages of FDI-led Industrialization
Preindustrialization

Initial FDI
absorption

Internalizing parts& components

Internalizing skills& technology

Internalizing
inonovation

Creativity

Agglomeration(acceleration of FDI)
Arrival of
manufacturing FDI
STAGE ONE
Simplemanufacturing
STAGE ZERO
under foreign
Monoclture,
guidancesubsistence

agriculture, aid
dependency

Cambodia,
Laos,
BangladeshTechnology
mastery

STAGE TWO
Have supporting
industries, but
still under foreign
guidance

STAGE THREEManagement &technology
mastered, canproduce highquality goods

Thailand,
Malaysia

Vietnam,Indonesia,
Philippines

Taiwan, Korea

STAGE FOUR
Full capability ininnovation and
R&D as global
leaderJapan?

Singapore(regional trade &ﬁnancial center)

Glass ceiling forSoutheast Asian nations(middle income trap)

The only economies in East Asia that have reached Stage 3 or 4 are Japan, Singapore, Taiwan, and Korea. All other economies in the region are unable to go past
Stage 2 because of their inability to create value wanted by the global market. To put
it another way, the key is internalization of physical inputs, skills and technology, andinnovative power in this order. Most countries in Southeast Asia can internalize up tophysical inputs but not others. We call this the Glass Ceiling phenomenon between
Stage 2 and 3. It is essentially the same as the problem of middle income traps.

1-5. Avoiding a future middle income trap
Some may argue that discussion of middle income traps is too early for Ethiopia
which is still a low-income country hoping to reach lower middle income by 2025.
But such a view is mistaken. Avoiding a trap is crucial for all countries regardlessof income level. Preparation should start before the country is actually trapped—thesooner the action, the better.
Countries with a large inflow of manufacturing FDI (Stage 1) often become complacent because structural transformation (industrialization) is visible in macro andsectoral statistics such as industrial output, the export share of manufacturing, etc. But
such industrialization is superficial because transformation is FDI-driven, and because
26Background and Overview

huge imports of industrial inputs are needed to sustain domestic manufacturing (inEast Asia this problem is called the absence of “supporting industries.”) With many
countries gradually raising income, the threshold of middle income itself has become
easier to cross, with 48.4% of countries and territories now classified as “middle income” by the World Bank.4 Governments should look beyond simple numbers suchas these to continuously improve human capital and enhance the competitiveness ofdomestic enterprises.
A middle income trap can be defined as a situation where an economy is unable
to create value beyond what is delivered by given advantages. Here, given advantages
include natural, demographic, and geographical factors as well as external factors suchas trade, aid, and FDI. The presence of such advantages often impedes accumulationof knowledge, skills, and technology because of various psychological, political, andeconomic reasons. The Curse of Natural Resources, also known as the Dutch Disease,
is well publicized. But having non-resource advantages can also negatively affect industrialization.
Any country that starts from a very low development level can enjoy rapid growth
for a decade or two simply by liberalization, privatization, and integration. However,as one-time freeing effects are exhausted, a critical moment arrives when growth begins to slow. That is when most countries realize that they are trapped. Beyond thispoint, fast growth can be sustained only if proactive industrial policy is installed torevitalize the private sector. The situation is illustrated in Figure 1-7. Ethiopia is stillin the initial stage where fast growth can be realized even with low-quality policy,
but it will soon reach a point where policy quality is critical. It is highly advisable toimprove industrial policy now rather than later.
We would like to present the hypothesis that the lack of quality in industrial
policy is the main cause of a middle income trap. The corollary is that installation ofhigh-quality policy that actively supports value creation by the private sector, beyond
just freeing and opening markets, is required to escape the trap. Policy innovationmust occur not so much in policy scope—because industrial policy menus are similar
across emerging and developing economies—but in how effectively commonly practiced policies are executed in such areas as education and training, small and medium
4

As of July 2015, the World Bank’s income classification has 31 low-income economies (14.4%), 51 lower-middle-income economies (23.7%), 53 upper-middle-income economies (24.7%), and 80 high-income
economies (37.2%) with the total of 214 economies.

27

CHAPTER 1

Figure 1-7. Diverging Growth Paths
Creation of internal value
through human capital
upgrading

Per capita incomeHigh

To high income

To a middle income trap
MiddleInitial growth driven
by liberalization,
privatization andintegration

Growth by given
advantages only; little
creation of internal valueLow
10-20 years

Criticalpoint in
historyTimeenterprises (SMEs), FDI attraction, industrial parks, export promotion, logistics andconnectivity, FDI-local firm linkage, etc. This does not mean that other factors suchas history, geography, natural resources, and capital inflow are unimportant. These areimportant and affect growth but they do not critically determine the long-term growthtrajectory of a country as policy quality does.
There are three policy areas that need to be improved. First, industrial policy inthe narrow sense must be activated to generate and sustain the sources of growth. Second, social problems caused by rapid growth must be dealt with such as income gaps,
environmental damage, uncontrolled migration and urbanization, traffic and housing
problems, cultural change, and a surge of materialism and corruption. Third, macroeconomic management must be upgraded under financial integration. For Ethiopia at
present, the primary objective should be vitalization of growth sources followed by
the solution of new social problems. Proper management of financial integration is an
important task for the future.
Our assessment of industrial policy quality is given in Table 1-2 for selected
Asian and African countries for which we have sufficient knowledge through policy
research. Four points are worthy of note even in this small sample.
First, there is a huge gap in industrial policy quality among governments from28

Background and Overview

excellent to poor. Not all Asian governments have high scores in comparison withproactive African governments such as Mauritius, Ethiopia, and Rwanda.
Second, policy quality and income are positively correlated. In our sample, correlation between industrial policy score and the log of per capita income is 0.815. Itshould be noted that correlation does not prove causality. However, positive correlation is at least suggestive, and consistent with the hypothesis that poor industrial policy
causes a middle income trap.
Third, within each country, sub-component scores are positively correlated. If
one policy is bad, others are likely to be also bad. There is a common policy culture
within any government that largely determines the effectiveness of all policy measures, with quality variation among them usually small and accidental.
Fourth, no clear relation is detected between policy quality and the possessionof natural resources. Resource-rich countries such as Malaysia and Indonesia do notshow any outstanding quality in industrial policy. Countries that have excellent industrial policy in our sample, as well as more generally, are often those poorly endowedwith natural resources.
In our policy scorecard, Ethiopia has a point average of 3.0 which is worse than
Mauritius, Malaysia, and Thailand (all of which are upper middle income countries)
but better than Vietnam, Indonesia, India, and Cambodia (all of which have higher
income than Ethiopia). I gave Grade B to Ethiopia but it is actually a borderline casebetween B and C. Within Ethiopia, industrial parks and FDI marketing get relatively
high marks but business climate and SME development receive relatively low marks.
Ethiopia and Rwanda are outliers in the sense that their industrial policies are muchbetter than the level expected of low income countries. This must be because they areserious learners of industrial policy, especially from East Asia.55For more on policy quality grading, see Kenichi Ohno, “The Quality of Industrial Policy as a Determinantof Middle Income Traps,” a paper presented at Singapore Economic Review Conference 2015, Singapore, August 2015.

29

30

4

1.9

2

1

1

1.8

2

2

4

4

5

4

5

5

1.7

4

4

1

2.0

2

4

4

4

5

4

4

5

3.1

3

3

2

2.8

2

4

4

5

5

5

5

4

3.9

3

1

3

1.6

2

3

4

4

3

5

4

5

4.3

4

2

1

1.7

3

4

5

5

4

3

3

5

4.4

4

3

2

2.2

1

4

4

4

5

4

3

4

2.0

2

0

1

1.5

1

4

3

1

…

…

…

5

3.2

2

0

1

1.4

1

2

4

4

5

4

4

5

2.0

1

1

1

1.5

2

4

3

4

5

5

5

4.7

3.0

2.7

1.5

1.4

1.8

1.8

3.4

3.9

3.8

4.7

4.3

4.2

B-

C

D

D

D

D

B

B

B

A+

A

A

A+

Grade

$505

$639

$950

$1,498$1,910$3,475$5,779$9,478$10,538$22,597$25,977$46,330$55,183

132

46

135

142

78

114

26

28

18

19

5

29

1

For reference only
Doing
Per capita Businessincomeranking(WB, 2013, (WB, 2014,
USD)
among 189
entries)

Notes:
1. Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent). For Vietnam and Ethiopia, for which detailed data are available, points are given to the firstdecimal point.
2. Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1).
3. Evaluation of policy prepared and implemented by national government only; results obtained by private effort, international cooperation, or external conditions are excluded.
4. It is somewhat difficult to evaluate the policy of a mature economy, such as Japan and Korea, with a large number of industrial policy measures in the past and at present. Grades may
differ depending on which measures are evaluated and how much weight is given to past achievements relative to present policies.

3.0

Sep. 2012

India

Ethiopia

Continuous since
1995

VietnamContinuous since2008

Jun. 2014

Indonesia

0

1

2005,
2009,
2013, 2015

Thailand2

1.5

Oct. 2012

Mauritius

May 2015

2

2006,
2010, 2013

Malaysia

Aug. 20143

Mar. 2011

Rwanda3

4

Nov. 2010

Korea

TaiwanCambodia5

5Continuous

Japan

5

5

Aug.-Sep.
2010

Domestic
Industrial
enterprise Businesshuman
climatedevelopresource
mentSingapore

Date of research

Supporting
ProducindusPower
Strategic
tivity,ExportIndustrial
tries &
Standards AverageandFDI
technology
promotionparks
FDI-local
and testing
logistics
marketing&firm linkinnovationage

Evaluation of industrial policy sub-components

Table 1-2. International Comparison of Industrial Policy Quality

CHAPTER 1

Chapter 2

Basic Direction
2-1. FDI-led industrialization
Ways to industrialization are many, and each developing country should choose
the path most appropriate for it. In choosing such a path, the aim should be strengthening the competitiveness of domestic firms and citizens, and unique conditions available to the home country should be utilized fully to this end. Guided by this principle,
we recommend a five-part industrialization strategy to Ethiopia at this critical junctureof its history. The five policy components are strategic FDI attraction, enterprise capacity building, FDI-local firm linkage, efficient logistics, and industrial human resources, as explained below.
Value creation by Ethiopian people and firms is the key to industrialization withquality. To attain this, there are basically two tracks:(i) Direct competition—strengthening Ethiopian enterprises, independently
from foreign partners, for export and/or import substitution which includes,
but not limited to, the creation of champion products; 1 and(ii) Indirect competition—strengthening Ethiopian enterprises so they canwork effectively with foreign producers and/or buyers as regular business
partners thereby attaining high standards and becoming a crucial link in a
global value chain.
Both tracks are valid and should be pursued simultaneously (the two-track approach). But for rapid and visible industrial results, the second track has a much greater
impact on the nation’s output, employment, trade, and structural transformation. Not
many developing countries receive light manufacturing FDI in large numbers, the kindof FDI that contributes greatly to early industrialization rather than just mining or realestate projects. Ethiopia is lucky to have such FDI, and this unique advantage should
be fully utilized. Thus we propose that FDI-linked technology transfer should be theprimary policy goal during GTP II (and possibly GTP III) while fostering autonomous
1

Even in creating champion products, initial contact with and learning from foreign buyers will be highly
beneficial until the producers of champion products improve marketing and technology and become able
to expand their global business by their own.

31

CHAPTER 2

and competitive Ethiopian enterprises is a very important but supplementary goal.
During the next decade, Ethiopia can learn global management, skills, design,technology, marketing, and standards faster by working closely with sharp-eyed foreign producers and buyers who demand high quality and reliable delivery rather thangoing it alone. Kaizen, technology institutes, management training, science and technology universities, and TVET should all be mobilized to attain this goal instead of
implementing them for general improvement without a concrete objective. After Ethiopia reaches middle income, around 2025, policy weight should shift gradually from
FDI linkage to more autonomous competition.
The five-part strategy shown in Figure 2-1 was presented to the Ethiopian government before, but details have been revised to reflect our current knowledge and ideas.
It should be used as a check list for policy formulation. The three most important
policy areas are FDI policy, enterprise policy, and linkage policy. Logistic efficiency
and industrial human resource must also be added as enabling conditions. During GTP
II and GTP III, policy effort must be exerted to carry out and deepen each component
under each policy area. Some of the components are already in place in Ethiopia butthey need to be strengthened. Others need to be newly introduced.
In FDI policy, Ethiopia has already embarked on revisions of Investment Proclamation and Regulation, creation of organizations and incentives for industrial parkdevelopment, and enhancement of one-stop investor service. These are appropriate
entry points, and continued effort should be made to improve investment support.
Ethiopia now targets FDI not only from emerging economies such as Turkey, India,
and China but also from advanced economies such as Japan, the United States (US),and the European Union (EU). What is still missing in this policy area is improvementof general business environment. Ethiopia’s current conditions in this aspect, such asreliable power supply, logistics, foreign exchange control, tax administration, customs
clearance, and other bureaucratic hassles, are not up to the standards of developing
Asia or Africa. To improve them, realistic action plans, an effective interactive mechanism with investors, and serious reform and enhancement of the Ethiopian Revenues
and Customs Authority (ERCA) and foreign exchange management are needed.
In enterprise policy, Ethiopia already practices benchmarking, and kaizen is expanding from a pilot project to advanced kaizen, national movement, and instruction
to other African countries with Japanese support. Export promotion has also been apolicy focus, with monthly high-level monitoring of export performance conducted32

Basic Direction

Figure 2-1. Five-part Industrialization Strategy for Ethiopia
ManufacturingvisionBecoming a leader in light manufacturing in Africa and one of theleaders in overall manufacturing globally

Manufacturing
targets for2019 / 20– Employment of 758,000– GDP share of 8%– Quality industrial HR– Export share of 25.6%– One or two industrial champion products with high VA

Policy areas (for FDI-linked technology transger):
1. Targeted attraction of
FDI & foreign buyers– General improvement of businessclimate– Good industrial parks– Improve one-stop service &follow-up support– Strategic marketing: bring manuf.
FDI from Asia & West– Hard & soft infrastructure– Reform laws & improve EIC, ERCA,
IPDC, Export Agency...

2. Local enterprise
capacity building
3. Linkage policy– Effective networking oflinkage organizations– Incentives & policy
support for linkage– Matching with buyers,
OEM & JV partners– Handholding for linkage– Management & marketing– Productivity through kaizen,
benchmarking, etc.
– Export promotion (incl. champion
products)– Champion companies– Sector-speciﬁc technology– Enhancing TIDI, LIDI, EKI...
– SME ﬁnance

Policy areas (cross-cutting):– Transport infra. & system

4. Efﬁcient Logistics – Fast & reliable

customs clearance

5. Industrial HR– Mindset chance– Effective training– Univ. & TVET withindustry linkage

for more than a decade. Under Economic and Business Diplomacy, the Ministry ofForeign Affairs (MOFA) directs Ethiopian ambassadors around the world to attract
FDI and promote export. Champion products and national branding were added tothe policy menu recently. In October 2015 the Export Promotion Agency was createdunder the Ministry of Trade which may become the focal point for Ethiopia’s existing
and future export promotion activities. Its functions and capabilities need to be monitored.
But there is much room for improvement and expansion in this component. SME
policy in Ethiopia is still in a very early stage. Japan, Taiwan, and Malaysia havehighly developed SME support mechanisms and JICA also has standard measures forassisting SME policy formulation in developing countries. From such perspectives,
three key components of SME support—management, sector-specific technology, andfinance—are still missing or very weak in Ethiopia. Among these, strategic enterprisemanagement capability, including marketing, should be top priority. Ethiopia should
broaden the scope of enterprise support in proper speed and steps (quick and random
33

CHAPTER 2

expansion is not recommended). This requires, among other things, further strengthening of the Ethiopian Kaizen Institute (EKI), the Textile Industry Development Institute(TIDI), the Leather Industry Development Institute (LIDI), the Metals Industry Development Institute (MIDI), the Ethiopian Horticulture Development Agency (EHDA)
and other technical support institutes in terms of functions, staffing, and budget. Whenbasic support for management, kaizen, technology, and finance become available up toa certain level, Ethiopia should begin pilot handholding by combining these supports.
EIC, EKI, TIDI, LIDI, the Ethiopian Management Institute (EMI) and others offeringvarious industrial services should form teams to intensively support a small number of
selected Ethiopian firms for one objective such as breaking into a new export market,
creation of FDI/buyer linkage, import substitution, and so on. Handholding should bestarted on a pilot basis during GTP II, to be scaled up later (See 3-4).
Linkage policy is virtually nonexistent because of the small size of manufacturing
FDI in Ethiopia in the past.2 But in the future, this policy must be activated. Policy
components include (i) creating opportunities for foreign and domestic firms to meetand discuss business (supplier-meet-buyer program, trade fairs, reverse trade fairs,
buyer seminars, factory tours, etc.); (ii) information service or database for locating
suitable domestic partners; (iii) financial incentives for eligible matching and linking activities; (iv) follow-up, monitoring, and trouble-shooting after matching; and(v) creation of an effective network of public and private organizations that support
matching and linking. Among Southeast Asian countries, Thailand has a relatively
well-developed mechanism in this regard, with Japanese and Thai private and public
institutions playing their respective roles and cooperating with each other to collectively serve interested Japanese and Thai firms (See 3-3).

2-2. The wage-productivity nexus
As explained earlier, the three compelling magnets for FDI are labor advantage,large domestic demand, and natural resources. If any of them is present, FDI willpour in even if business climate is unfavorable. Ethiopia’s current attraction is lowcost labor with reasonable quality and discipline, an advantage that few other Africancountries can duplicate. To sustain industrialization, it is imperative that this labor234

The only exception has been the strong request by the Ethiopian government to individual industrial or
infrastructure projects undertaken by foreign firms or governments to use as much domestic input andlabor as reasonably possible and train workers during the initial construction stage of the project.

Basic Direction

advantage be jealously guarded at least for the next decade or two.
Great attention must be paid to the developments of wage and labor productivity.
An appropriate ministry or agency should monitor them. Since accurate and comprehensive datasets are difficult to obtain at first, data collection must start with what isavailable and possible, to be expanded and upgraded later. Productivity is the rightfocus for Ethiopia during the GTP II period and even up to 2025. Later, when middle
income is attained, when unskilled labor supply is exhausted, and when the nation has
produced a sufficient number of high- and middle-level managers and engineers, policy attention must shift to creativity and innovation as was done in Japan, Taiwan, andKorea. Malaysia and Thailand are currently trying to make such a shift.

Wage and productivity data
Ideally, manufacturing wage data should be collected and published annually forthree categories: unskilled workers (start-up level), mid-level engineers and technicians, and managers. If data are limited initially, unskilled worker wages in industrial
zones and large and medium enterprises (LMEs) in the Greater Addis Ababa Area
and other industrial cities, and only for garment, footwear, leather, and floriculture,
may suffice for monitoring Ethiopia’s wage competitiveness in the first years. Overtime, the wage data should be expanded sectorally and geographically as budget andexperience increase.3
Regarding productivity, labor productivity (value-added per worker) should be
the indicator to which greatest policy attention should be paid, as in Singapore andMalaysia. Labor productivity should be measured in the following two levels:(i) Sectoral (manufacturing) and sub-sectoral (textile, footwear, etc.) labor productivity using existing datasets such as value-added and number of workers.
(ii) Micro (factory) level labor productivity for selected processes in the priority sectors, such as productivity of garment workers, leather shoe workers,
flower pickers, etc. (for example, number of shirts cut or sewn per worker
per day) based on firm surveys.
The results should be published annually together with corresponding data in
3

During Japan’s high growth era in the 1950s and 60s, the Ministry of Labor monthly surveyed wages
disaggregated by sector, occupation, worker’s gender and age, and establishment size. Labor productivity
data were also collected by sector and establishment size. Such frequent and detailed data are not realistic
at present in Ethiopia, but should be planned in the medium to long run.

35

CHAPTER 2

competing countries. Additionally, other measures such as the incremental capital-output ratio (ICOR) (for measuring capital efficiency), total factor productivity(TFP) (for measuring overall efficiency), and technical efficiency estimates for sectors
and individual firms (Data Envelopment Analysis (DEA), Stochastic Frontier Analysis (SFA), etc.),4 may be used for a broader picture, but they should not be viewed as
officially monitored indicators because of data deficiency and the lack of robustness
in measurement.
As we noted earlier, wage increase in many East Asian economies is outstripping labor productivity growth. Wage is driven up by aggressive labor unions and/or
politicians who need votes. Politicized wage settlement in the absence of comparable
productivity growth is a very serious problem in developing economies in Southeast
Asia today. Sooner or later, they will face a middle income trap where simple manufacturing is no longer possible due to high labor cost but advanced manufacturing
does not emerge because necessary human capital is lacking. Ethiopia should not get
into this bind.
Figures 2-2 and 2-3 illustrate manufacturing labor productivity and wage levels
in Asia. As for labor productivity, from 1995 to 2013, only China (8.8%) and Myanmar (8.3%) registered relatively high growth (Myanmar’s performance may have to
be checked for data quality). Labor productivity growth in other countries, such as
India (4.8%), Vietnam (4.5%), and Cambodia (4.3%), was lower than 5% per year. In
Malaysia, Thailand, and Indonesia, it grew only about 2% per year. The Philippines’
actually declined from 2005 to 2011.
As for wage, until about a decade ago wages in most Asian countries fluctuatedannually without clear trends. More recently, however, China, Malaysia, Thailand,
Indonesia, Vietnam, and Myanmar began to allow significant wage increases far beyond labor productivity growth. It should be noted that wage data here are expressedin USD which means they reflect both domestic wage settlement and exchange rate
movement.
Meanwhile, East Asia’s early industrializers—Japan, Singapore, Taiwan, Korea—did not face this problem. Wage and labor productivity rose in tandem during
their high-growth periods preserving wage competitiveness. They soared to high436Such technical estimates were made in Kidanemariam Berhe Hailu, “Technical Efficiency and Firm
Growth Dynamics in the Ethiopian Manufacturing Sector,” doctoral dissertation, GRIPS, 2014. Mr.
Kidanemariam was a PhD student under the supervision of Kenichi Ohno and received a doctoral degreefrom GRIPS in September 2014. He is now a lead researcher at Meles Zenawi Leadership Academy.

Basic Direction

Figure 2-2. Asia: Manufacturing Labor Productivity Index
Level index with base year 1995
500

Thailand(Bangkok)

450

Malaysia(Kuala Lumpur)

400

Philippines(Manila)350

Indonesia(Jakarta)

300

Cambodia(Phnom Penh)

250

Myanmar(Yangon)200

Vietnam(Hanoi)

150

India(New Delhi)

100

China
(Beijing)

50

Bangladesh(Dhaka)
2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0

Source: Asian Productivity Organization website.

Figure 2-3. Asia: Worker Monthly Wage
USD / monthThailand(Bangkok)600
No datafor 2007Malaysia(Kuala Lumpur)

500

Philippines(Manila)Indonesia(Jakarta)

400

Cambodia(Phnom Penh)
300

Myanmar(Yangon)Vietnam(Hanoi)

200

India(New Delhi)
China(Beijing)

100

Bangladesh(Dhaka)
2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0

Source: JETRO annual survey on Comparison of Investment-related Costs among Major Cities and Areasin Asia. Data for 2007 is unavailable.

37

CHAPTER 2

Table 2-1. Average Monthly Wage in Ethiopia
TextileLeather
FlowerAverage
Birr/USD
Nom. RealNom. RealNom. RealNom. Real (end Dec)
USD
USD
USD
USD
Birr Birr
Birr Birr
Birr Birr
Birr Birr

CPI

2010/11 74.8 1205 1205 83.0 1337 1337 34.3

553

553 64.0 1032 1032

16.1178100.0

2011/12 76.5 1339

654

488 65.4 1145

17.4963134.1

999 82.3 1441 1075 37.4

854

2012/13 75.3 1377

905 83.6 1527 1004 42.9

783

515 67.3 1229

808

18.2784152.2

2013/14 83.8 1598

971 97.8 1865 1134 49.1

936

569 76.9 1466

891

19.0748164.5

2014/15 88.7 1783 1017 95.1 1911 1090 58.0 1166

665 80.6 1620

924

20.0956

175.4

Source: See footnote 6. The wage data includes tax payment and social security contribution.

income without hitting any traps. For example, during Japan’s high growth period(1955-1970), manufacturing labor productivity rose 10.0% per year and manufacturing wage rose 10.2% per year.5 At the same time, the exchange rate was fixed at$1=360 yen from 1949 to 1971. Thus, Japan kept wage competitiveness for 15 years
as industrialization proceeded at high speed with improving quality and expanding
product variety.
A recent JICA-commissioned study on wage and labor productivity in Ethiopia6
produced the following results. Based on a firm survey, average wages in garment,
leather, and floriculture sectors, inclusive of social security and tax payments, are presented in Table 2-1.
From the same study, Ethiopia’s manufacturing labor productivity, computed asreal value-added in manufacturing per employee using the Central Statistical Agency (CSA) and the Ministry of Finance and Economic Development (MOFED) data,
is reported in Table 2-2. Average growth of manufacturing real value-added from2000/01 to 2011/12 was 9.9%, which was mostly due to the quantitative expansion of
workforce (7.0%) rather than improving labor efficiency (2.7%). The annual growthof manufacturing labor productivity of 2.7% is low by the Asian standard discussed
above. In East Asia, even countries having labor productivity growth of 3-5% peryear are facing middle income traps. For Ethiopia, manufacturing labor productivity
growth of 5-10% per year should be a realistic target provided that proper policy and
5

6

38

Because the Japanese labor market was nationally integrated, wages in all sectors, not just manufacturing,rose about 10% annually during 1955-1970. Average inflation in consumer prices during that period was
4.3% per annum, which was slightly higher but not much different from those in other industrial economies.
Ethiopian Inclusive Financial Training and Research Institution, “Basic Empirical Research on Productivity and Wage in Ethiopia,” a JICA commissioned study, September 2015.

Basic Direction

Table 2-2. Ethiopian Manufacturing: Value-added, Employment,
and Labor Productivity (Real birr per employee per year)

2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/102010/112011/12
Average annual change

Manufacturing value
added in million ETB(Real)
5,032
5,044
5,117
5,512
6,152
6,992
7,655
8,618
9,504
10,797
12,324
14,284
9.9%

Manufacturing
employment

MVA / employee(real ETB)

93,73798,986
101,404
105,381109,150
118,468
134,963
131,803148,817
185,086
173,397
198,088
7.0%

53,68450,96050,46452,30756,36659,022
56,721
65,38563,86758,336
71,073
72,108
2.7%

Source: JICA study (see footnote 6) based on CSA's Large & Medium Size Manufacturing Survey and
MoFED’s GDP data.

popular mindset are in place. Policy instruments discussed in chapter 3 below shouldbe actively mobilized to attain it.

Social compact
We propose a tripartite social compact that will deliver a “win-win-win” solution
for management, workers, and government, and can also serve as a background for
National Kaizen Movement. A social compact such as this was launched by Singapore(the Charter for Industrial Progress) in 1965, the year of its independence, to copewith hostile management-labor relations and the rise of Communism. The compact
still guides Singapore’s socio-economic policies even today. More practically, sucha compact is also needed to avoid a situation where annual wage demand greatly exceeds labor productivity growth, a malaise seen in Southeast Asia as discussed above.
Under the three-way compact, the following pledges should be made.
(i) Each party shall make maximum effort to raise productivity—managementby conducting benchmarking, kaizen, shindan, handholding, etc.; workers
by actively participating and adopting positive mindsets and attitudes; andgovernment by introducing effective policies and incentives.
(ii) Wage increase should be equal to labor productivity increase (of the previous year, some smoothing may be necessary to remove the effect of39

CHAPTER 2

business cycles). Reliable official statistics for labor productivity must be
created and announced.
(iii) Fruits of economic growth should be shared fairly among management,
workers, and consumers. Government has the duty to make sure that thisis the case.
To implement such a virtuous circle, government should regularly monitor wage
and labor productivity trends, appeal to the public the importance of balanced movements in wage and productivity, and take remedial measures when excessive wage
increase or sluggish labor productivity is detected. Citizens and entrepreneurs should
be informed that this formula is necessary to maintain wage competitiveness, achieve
higher income and full employment, and build a proud nation.
Additionally, macroeconomic policy for inflation control and exchange rate management is vital for avoiding overvaluation and keeping wage competitiveness in themedium to long run. This important issue is not the topic of Industrial Policy Dialogue
and therefore will not be touched further.

Anticipating and minimizing labor problems
Unemployment is a big problem in many developing countries. However, labor
shortage is also an acute problem in countries that absorb a large amount of manufacturing FDI. Even if there is unemployment at the national level, pockets of labor
shortage can develop if the labor market is not integrated and/or if workers are notequipped with required skills. FDI usually concentrates in a few areas where infrastructure and business conditions are good, such as industrial parks near large cities
or deep seaports. Meanwhile, the supply of workers fit for labor-intensive tasks (forexample, young females with high school diploma) or mechanical works (engineers
and technicians) in any locality is limited. When each FDI firm hires hundreds or thousands of workers, and when such firms multiply, the local supply of suitable workers is
quickly depleted, high salary search and job hopping become rampant, and firms startpoaching workers from each other. Wages start to rise. This happened in Penang, Malaysia in the 1980s; Ho Chi Minh City, Vietnam in the 2000s; and Thailand currently
faces an acute shortage of manufacturing workers of all types in all locations. To easethis problem, a number of solutions are possible.
First, market-driven labor migration from rural to industrial areas, in pursuit ofcash income, may occur spontaneously. Such labor migration may be temporary, sea40

Basic Direction

sonal, medium-term (2-3 years), or more permanent. Since it is market-driven, whether and how much such internal migration will occur is entirely up to workers.
Second, labor-using FDI firms may relocate from urban to remote areas in searchof labor supply. Local governments are naturally happy to receive FDI as a job generator, and workers can commute from their villages (and accept lower wages for thisadvantage). Such internal relocation of factories is also widespread in Southeast Asia.
For this to happen, however, remote areas must meet minimum standards in transport,
power, and other business necessities. Government also often encourages geographical diversification of FDI for economic and political reasons. In Ethiopia, geographicaldiversification of industrial zones is already a national strategy. This policy will bear
fruit only if it addresses private sector incentives properly. Thailand, Malaysia, and Indonesia tried to divert FDI to rural areas with geographically differentiated incentives
but the results were not encouraging.
Third, a specialized TVET facility can be established near an industrial park to
train young people with skills appropriate for the type of industries located in the industrial park. Singapore built a TVET center to teach electronic skills to middle andhigh school graduates next to Vietnam-Singapore Industrial Park in Binh Duong, Vietnam, where several hundred electronics FDI firms operate. This made firms, workers,
and local government all happy.
Fourth, some high and middle income countries (Singapore, Korea, Malaysia,
Thailand, etc.) import foreign workers for simple manufacturing as well as for basic
services such as trade, catering, construction, and domestic service. However, governments are sometimes ambivalent about this policy because the presence of foreigners
considerably eases labor shortage but it may also create social tension.
Ethiopia should forecast the size and nature of labor problems in advance. It
should not be too difficult to estimate the total number and type of workers demanded
by light manufacturing FDI when Bole Lemi 1 and 2, Kilinto, and other industrial
zones near Addis are filled. The supply of suitable local workers should be estimatedon various assumptions about internal labor migration, geographical boundaries fordaily commuting, education and skill levels, etc. Labor demand and supply for otherindustrial zone locations such as Hawassa and Dire Dawa should similarly be studied.
It is not yet clear how much internal labor migration will occur in Ethiopia and whatpattern it will take, and whether ethnic and cultural differences across regions deter
migration. But it is perhaps safe to assume that significant internal labor mobility
41

CHAPTER 2

will occur given the fact that Ethiopians are already working in the Middle East andelsewhere.
Social issues surrounding industrial workers should also be anticipated and dealt
with. Migrant workers often share cheap rooms or live in company-provided dormitories (if available). Labor authorities should ensure that industrial workers have fullrights as well as adequate housing, food, nutrition, and hygiene. They should also havesafe and healthy working conditions and be paid properly including overtime. In many
Asian countries, labor disputes arise over inhuman labor treatment or nonpayment ofsalaries, often leading to wildcat strikes and sit-ins. In Vietnam, “professional” laboragitators roam around industrial parks to cause trouble at FDI factories. Constructive
management-labor relationship is a proper concern for policy makers. On the worker
side, they should be taught to know their rights and responsibilities, form career plans
and upward mobility, and strive for long-term skills acquisition instead of hoppingjobs at the slightest difference in monthly salary.
Government should provide incentives for firms to train their workers, by preparing training programs and centers, creating a Skill Development Fund to which
all firms must pitch in and from which they can withdraw for training workers, andoffering other conditional subsidies.

2-3. Industrial policy timeline
Industrialization is a long and staged process. A student must begin with basics,
then proceed to more complex and advanced challenges with right speed and underproper guidance, and finally graduate into an independent and full-grown player who
can lead and teach others. Just as education from kindergarten to university, proper
sequencing must be followed in industrialization. Jumping grades and skipping lessons is possible for an exceptional few, but too much leapfrogging is not advisable fornormal students. This is particularly true for a country having a large farming population who must be taught skills and provided with gainful employment in increasingly
difficult tasks and sectors. While more than one development pattern should be permitted in light of different national conditions, random deviations from the norm are
not recommendable.
For a country embarking on FDI-led industrialization, such as Ethiopia, East
Asian experiences can provide a norm. As explained earlier and illustrated in Figures
1-5 and 1-6 above, East Asian economies exhibit clear technological orders and struc42

Basic Direction

tural patterns with strong intra-regional linkage. Production cooperation in East Asia
has evolved dynamically from simple teaching to more complex competition including overtaking. But this hardly implies that all countries are now alike or converging to
the same technological level. The death notice of Flying Geese is highly exaggerated;
East Asian birds are still flying with different capabilities and functions.
Countries like Ethiopia should first attract a sufficient amount of manufacturing
FDI (mainly light manufacturing but also supporting and associated industries andservices as well) by activating proactive industrial policy and improving business environment. Arrival of a few to several thousand foreign manufacturing establishments,
as seen in Thailand, Indonesia, and Vietnam, can be considered as successful completion of this initial stage. Continuous vigorous FDI inflow can attain it in about a decadeor two in any country.
The next challenge is a shift from quantity to quality, as well as from foreigners’
value creation to domestic value creation (Figure 1-6 above). This calls for more advanced industrial policy such as FDI-linked technology transfer, creation of linkages
and clusters, SME promotion, supporting industry development, enhancing top-level
managers and engineers, national productivity movement, and what Malaysia in its
Industrial Master Plan 1996-2005 called “Manufacturing Plus Plus.” This is a desire tostrengthen capabilities of domestic industries both horizontally and vertically (hence
two pluses), first by engaging in more value-creating processes, both upstream anddownstream, and second by improving productivity of each process along the value
chain curve, as shown in Figure 2-4. By internalizing value creation and replacing
foreign managers and engineers, a country becomes a globally competitive exporter ofhigh-value products and/or components.
Finally, a country must graduate from being an efficient copycat to a true pioneer.
Instead of mass-producing what the US or Japan invented with high quality and low
cost, value must now be generated by bringing something entirely new to the world inwhat Schumpeter termed Creative Destruction, and replacing an old industry by a newone. Technology, innovation, Research and Development (R&D), higher education,
attracting people with high competence and knowledge, creation of high-end industrial clusters, and protection of intellectual property rights become the main focus inthis stage.
These three stages may have overlaps, but no nation can jump to the last stage
without mastering the first two. Nice-sounding words such as high-tech, Information
43

CHAPTER 2

Figure 2-4. Malaysia: Manufacturing++
Valuecreation

Upstream

Downstream

Current
position
R&D

Product
designAssembly &production

Distribution

MarketingSource: The Second Industrial Master Plan 1996-2005, an interview with Malaysian industrial planning
officials in 2006, and the website of the Ministry of International Trade and Industry of Malaysia.

and Communication Technology (ICT), software, new energy and materials, nano-technology, bio-technology, and the like, are often randomly thrown into policy
documents of developing countries. Anyone can use ICT or new energy, and academic
research in frontline science can be done at any university. But commercialization ofhigh-tech industries such as these is hardly possible in a country where factories havenever heard of 5S (Seiri, Seiton, Seisou, Seiketsu, Shitsuke) or muda elimination, highschool graduates do not have the right attitude or competence, and engineers with basic operating skills are in acute shortage.
Ethiopia, as a latecomer, should currently mind the first and second stages while
the third can be dealt with later. At one of the High Level Forum sessions, participants
asked if it was proper for Ethiopia to focus on light manufacturing, especially garment,in view of the fact that garment was only a labor-intensive, low-skill sector from which
Asian countries now tried to get out, and because Ethiopia must also graduate from itin the future. Our answer was a resounding Yes to garment FDI now, because proper
steps must be taken by any country on the way to industrialization—and light manufacturing is the proper first step for Ethiopia to learn management and technology. The
large inflow of light manufacturing FDI is the great opportunity that only Ethiopia,
among all African countries, is now beginning to enjoy. Ethiopia should take fulladvantage of it to create a large light industry cluster, and build domestic capability
44Basic Direction

around it by working with FDI firms.

Import-substituting and heavy industries
In February and August 2014, Prime Minister Hailemariam explained to the Japanese policy dialogue team that light manufacturing was the current policy focus butthat did not mean Ethiopia would not develop heavy industries with large domestic demand. The Ministry of Industry (MOI)-Adama University Study of Ethiopian
Industrial Development in 2013 listed many heavy and “high-tech” industries to bepromoted during GTP II and GTP III.
We support promotion of import-substituting industries that have large domestic
demand. This includes certain industrial machinery and parts; construction materials
such as steel bars, tin roofs, and cement; and certain consumer goods such as processed food, drinks, household items, and popular medicine. Large and growing domestic demand should justify investments in these areas. We believe Ethiopia has noplan at this time to create export-oriented heavy industries. But we would like to makea few cautionary remarks because import substitution is more subtle than export promotion, which is straightforward in its policy formulation and performance criteria.
We acknowledge that policy played an important role in developing such industries as
cement, leather, and flowers in the past.7 But as private and FDI players become more
active, policy must move to a new phase. We would like to emphasize the following.
First, light manufacturing must be the main driver of growth, in the sense thatwithout it Ethiopia cannot attain robust and sustainable industrialization during GTP
II and GTP III. Heavy industries will also be important, but they are supplementary inthe sense that their demand is derived from rising income generated by an expansionof export-oriented light manufacturing (hopefully not by land bubbles), and that their
growth alone cannot bring structural transformation or middle income status to thecountry. Thus light manufacturing should be the top national priority.
Second, the pursuit of import substitution should be selective, conditional, andtentative. Not all inputs need to be produced domestically in this globalized world.
Domestic production must be justified by international competitiveness in terms ofcost, quality, and reliable supply, and not just by the fact that the country needs to reduce imports. Government should assist domestic producers to improve performance,
7

See chs.4-6, Arkebe Oqubay, Made in Africa: Industrial Policy in Ethiopia, Oxford University Press,
2015.

45

CHAPTER 2

but assistance should be terminated if they are unable to deliver results or become able
to compete by themselves. Subsidies and protection should be used only initially andtemporarily. Failed export is automatically eliminated by merciless global markets,
but there is no mechanism to end support for failed import substitution unless government is willing to do so.
Third, the private sector should be the investor and producer. When income
grows and demand for certain goods rises, there will be a natural incentive for FDI
and/or domestic firms to invest in that sector whether it is cement, construction steel,
textile machines, garment accessories, instant noodles, shampoo, or tooth paste, because (anticipated) large demand is the strongest business motive. There is little needfor government to directly produce these items or encourage more business entry
through policy measures. However, even in such circumstances government still has
a very important role to play. It should (i) create demand forecasts for guiding private
investors; (ii) provide coordinated support and incentives for skill formation and technology learning; (iii) solve labor, logistic, environmental, and other bottlenecks; (iv)
set and enforce quality and safety standards; (v) prevent excess entry and a mutuallydestructive race toward low price and low quality (as often seen in China); (vi) police
illegal and irresponsible activities; and (vii) counter dumping, cartelization, and otherdamaging behaviors of foreign countries and firms. In a nutshell, policy must create
and manage markets in which private firms can play smoothly and productively.
For these reasons, import substitution in general, and of heavy industries in particular, requires more experience and sensitivity on the part of policy makers. It requires much more work than just drafting master plans with quantitative targets or expressing desire to fill a certain percentage of demand by domestic production. Ethiopia
should acquire necessary experience and sensitivity as it promotes heavy industries
with deliberation and care.

Evolution of FDI policy
FDI policy must also evolve as the national economy develops and government’s
policy capability rises. Broadly speaking, the policy must start with the provision of
comfortable business environment aiming at absorbing a critical mass of FDI (especially manufacturing FDI), then proceed to the stage where quality and value creationof FDI, rather than sheer quantity, becomes an overarching objective. Let us elaborate.
In the first stage, the policy objective is provision of good business conditions.
46

Basic Direction

A country just opening up to the global market typically has poor business conditions and low policy capability. Infrastructure must be built, legal frameworks mustbe established, and FDI policy and incentives must be created and improved. Government officials must be trained and new agencies must be formed. Irregularities anddelays should be detected for correction. Corruption and arbitrary decisions must be
replaced by open and transparent rules. Up-to-date information and one-stop service
must become available to all investors. Industrial parks of one kind or another need tobe created to provide exceptionally good operational conditions. If these efforts bear
fruit, FDI will come to the country in large volume and begin to visibly transform
its industrial structure. This is the quantitative FDI achievement in the early stage ofindustrialization.
In the second stage, the policy objective is domestic value creation. The country
already has reasonable—if not perfect—business climate and risen in the World Bank
Doing Business ranking, and a large number of FDI firms are operating. However,most of value-creating activities such as business strategy making, R&D, technology,
product design, production management, quality control, global procurement, marketing, branding, and so on, are still in the hands of foreigners while the country’s contribution is mainly in the forms of unskilled labor and industrial land. Though wages
gradually rise and poverty declines, the levels of technology and income are still low
or moderate. To overcome this “middle income trap” situation, policies and institutions must be upgraded to encourage (or even force) improvements in human capital,
productivity, and (later) innovation. FDI policy must shift from general attraction to
conditional and strategic attraction. In this stage, foreign firms that facilitate domestic
value creation is welcomed while labor-intensive, simple-process manufacturing is
asked to leave—or they spontaneously leave under the pressure of rising wages andunskilled labor shortage.
These two stages of FDI policy may be subdivided into many phases. Moreover,
the two stages normally overlap with the weight of the first-stage gradually falling andthe weight of the second gradually rising. But the important point is that any country
that successfully completes the quantity-driven stage of industrialization must shift
from general improvement of business conditions to domestic value creation. At thesame time, it is not advisable to try to jump to selectivity before comfortable andsmooth business conditions are established.
Among the countries in Southeast Asia, Myanmar is the latest comer just begin47

CHAPTER 2ning to integrate into the world economy with embryonic FDI policy and weak institutions. The cases of Vietnam, Indonesia, and the Philippines are mixed; they should
start moving from the quantitative to the qualitative stage, but their governments seemunable to take the correct steps.8 Malaysia and Thailand, which already attained theupper middle income status with large FDI accumulation, practice selective FDI policy for domestic value creation.9 Highly advanced economies such as Singapore andTaiwan are primarily interested in enhancing competitiveness through innovation.
Their FDI policies and business conditions are already first-rate and no further great
improvement is needed.

Quality manufacturing and infrastructure
Two related concepts of quality manufacturing and quality infrastructure can be
introduced. They are also closely related to the notion of FDI-linked technology transfer.
Quality manufacturing is the term the Ethiopian government already uses to describe manufacturers that contribute to Ethiopian industrialization. Its scope and criteria need to be defined more precisely, and it should not mean the use of expensive
high-tech machines or frontline capital-intensive technology. We believe the concept
must satisfy at least some—preferably all—of the following conditions.
(i) Creation of sufficient domestic value-added.
(ii) Application of skills and technology appropriate for Ethiopia’s current
reality and desire to accelerate industrialization (not necessarily the mostadvanced technology).
(iii) Training of Ethiopian engineers, technicians, and workers not just for normal operation but also for safety, maintenance and repair, problem-solving, efficient operation, muda elimination, and other actions and proposals
for improvement.
(iv) Use of as many local machines, parts, and materials as technically and
8

9

48

Indonesia is highly demanding to FDI with various requirements to bring value and process raw materials
within the country, but its general investment climate remains primitive and unfriendly. As a result, thecountry attracts a large number of foreign firms that target the large domestic market but few technology-transferring FDI is arriving.
Thailand recently made a big change in FDI policy from zone-based incentives (rural FDI received more
incentives than urban FDI, and all manufacturing FDI was welcomed) to a scheme where incentives are
given only to designated sectors and activities that enhance Thai technology and value creation. The
new policy, introduced on January 1, 2015 after a one-year publicizing period, was inevitable because
Thailand has already attained upper middle income ($5,370 in 2014) and faces severe labor shortage of
all types.

Basic Directioncommercially possible for construction, equipment, and daily operationof the project.
(v) Full compliance with local laws and regulations governing labor, commercial, industrial, environmental, financial, tax, customs, land, and othermatters.
Quality infrastructure is the term the Japanese Ministry of Land, Infrastructure,
Transport and Tourism (MLIT) is beginning to use in order to promote Japanese design, construction, and maintenance in the global infrastructure market. Exact definition of quality infrastructure is still under consideration at MLIT, but in our opinion
should include such features as below.
(i) Excellent physical quality including safety, comfort, disaster proof, anddurability.
(ii) Life-cycle efficiency including observance of contracted construction costand period, long life, and easy and low-cost maintenance.
(iii) Technology transfer in construction, operation, and maintenance.
(iv) Existence of a regional development plan with the infrastructure project asa core component, which includes local government’s planning capacity,
engineer and worker training, industrial zones, agricultural development
and marketing, construction of residential areas, efficient logistics, traffic
management, etc.
Despite high quality, Japanese infrastructure is often criticized for high cost andlong procedure. It is actually difficult for Japanese contractors to beat Chinese rivals
in terms of construction cost and speed. Low-cost and fast construction is attractive
for countries in haste with a tight budget. But expensive infrastructure may not be so
expensive if durability, maintenance, and integrated use for development are taken
into account. Toyota Corolla and Hi Ace run almost forever with proper maintenancewhile cheap cars break down immediately. Also, dishonest contractors push up costs
deliberately in the middle of a construction period, after securing the contract by offering a seemingly low price. Opting for quality infrastructure thus requires long-term,
multi-faceted perspective to judge the true value of infrastructure projects as well as
sufficient financial resource to overcome the short-term budget constraint.

A long-term liberalization roadmap
Ethiopia is one of the countries that maintain a relatively tight control on foreign49

CHAPTER 2

business penetration. Manufacturing and agricultural investments are welcomed withthe red carpet but many service areas remain closed or severely restricted to FDI. The
positive list of permitted sectors to FDI, summed up from the EIA/EIC investor brochure in 2013 and 2014, are as follows.
Manufacturing, agriculture, ICT, power generation, hotel and tourism, grade 1
construction, real estate, secondary and higher education with own building, TVET,
health service with own building, architectural and engineering technical service, publishing, import of liquefied petroleum gas (LPG) and bitumen, designated export andwholesale trade
Meanwhile, prohibited sectors for FDI include the following.
(i) Government monopoly areas—postal service, power transmission and distribution, passenger air transport.
(ii) Joint venture with government required—weapons and ammunition, telecom services.
(iii) Areas only for domestic investors—certain designated items in the following sectors: export, import, and wholesale trade; textile; leather; construction; construction materials; education; medical service, printing, etc. (fordetails of designated items, consult EIC or EIC documents)(iv) Areas only for Ethiopians—financial service, insurance, broadcasting, legal service, advertisement, domestic air transport, shipping business, etc.
Some of these restricted sectors are understandable for low-income countries
while others are more controversial. The controversial areas include financial service,(large-scale) retail trade, telecom service, and domestic land transport. Some countries—Cambodia and Rwanda, for example—choose to open up these markets in theearly stage of industrialization, thereby building domestic financial, commercial, telecom, and logistic infrastructure and networks by foreign technology and investment.
Others reserve these markets for domestic operators only, even with limited knowledge and resources, to avoid foreign dominance. Ethiopia adopts the latter strategy.
Mr. Meles explained to the Japanese team that this was necessary for retaining sufficient policy instruments for development. Another justifying reason may be to shield
and assist domestic firms in these sectors until they are strong enough to compete withforeigners (the infant industry protection argument).
We support the current policy of the Ethiopian government that keeps designatedservice sectors off-limits to FDI. We do not subscribe to the idea that immediate liber50

Basic Direction

alization and opening up of all sectors will benefit poor countries. We believe that theabove two arguments are valid under some circumstances.
But we do not support the Ethiopian policy unconditionally. As we explained
above, development strategy must evolve as situations change. This is true not only forindustrial and FDI policy but also for external liberalization. Even though protectionof key service sectors is appropriate for a low-income country with subsistence agriculture and weak industries, such protection is not defendable forever. As the country advances toward lower-middle income and above, a plan should be drawn up to
open up these service markets partially, conditionally, and step-by-step. Even in thisstage, we do not recommend a sudden, big-bang liberalization. Unprepared opening isfraught with dangers even for high-income countries.10 But we consider it importantthat Ethiopia starts to prepare a long-term roadmap for global financial and service
integration during GTP II and GTP III.
The key variables that determine the scope and speed of such liberalization are (i)growth of domestic industries and markets; (ii) policy awareness of and preparation
for possible integration risks; and (iii) the degree of global financial and service market
instability. Among these, (i) calls for significant effort on the part of domestic players,and (ii) requires serious policy learning by the government. The liberalization schedule must also be synchronized with the accession negotiations of the World Trade
Organization (WTO). It should be stressed that the announcement of such a roadmap,
even if liberalization does not occur immediately, bestows confidence to the psychology of investors, both domestic and foreign, and makes it easier for them to plan theirbusinesses in the long run. Also, in some cases, entry of globally competitive foreign
firms into the home market can break inefficient domestic monopoly and improve
competitiveness of the sector.
In sum, proactive industrial policy and external liberalization are the two sides ofthe same coin. They must be implemented in a strategic and mutually consistent way.11
10

11

Financial liberalization of Japan in the 1980s prompted commercial banks to lend carelessly to real estateand SME projects leading to a land bubble and its crash. Capital market liberalization in Southeast Asia
led to large inflows of short-term bank loans and its sudden reversal in 1997-98 causing the Asian Financial Crisis. After the Lehman Shock of 2008, few countries are willing to support unregulated high-techfinancial engineering.
An industrial official in India explained to us that, thanks to continued liberalization, the negative list ofrestricted sectors to large or foreign firms, which numbered over 800 items in 1991, was reduced to only
27 items by 2012. However, the problem of Indian industrial policy is the lack of interest and measures
to enhance domestic human resource and firms. Without strengthening domestic players, progress ofexternal opening alone will not automatically bring prosperity.

51

CHAPTER 2

We believe the time is approaching for the Ethiopian government to begin to seriously
study the areas, sequencing, and speed of external liberalization for the future.

Policy procedure and organization
In Ethiopia, FDI attraction and industrial park development were recently placed
under the Prime Minister for speed and effectiveness. Champion products and national
branding may soon be handled by EIC, which also reports directly to the Prime Minister. We suspect that other key policies, such as ERCA reform, might also be centrally
managed.
It is understandable that a developing country with limited policy capability wants
to set up a powerful agency directly under the president or prime minister to push key
national agenda forward rather than assigning them to weak line ministries. In 2008,
Rwanda created the omnipotent Rwanda Development Board (RDB) covering FDI,
industrial zones, SMEs, ICT, tourism, private sector development, and employment
generation. Similarly, Cambodia is bestowing various policy authorities—Official Development Assistance (ODA), FDI, industrial zones, and even industrial policy making—to the Council for the Development of Cambodia (CDC) established in 1994.
Ethiopia also adopts central policy management as this is a critical moment for thecountry and the window of opportunity should not be missed.
But this may generate a new problem—the problem of a central agency becoming
too big and overstretched while line ministries remaining fragile and under-utilized. In
Rwanda and Cambodia, policy planning has been enhanced but MOI remains as weakas ever and ground-level works to assist farmers, workers, engineers, SMEs, etc. also
remain weak. This is a problem of balancing policy speed with the need to strengthenline ministries. We do support the current centralization of industrial policy authorities
in Ethiopia but we also hope that the right balance will be struck between the two goals
in the long run.
A strong MOI is needed for long-term industrialization with quality because thePrime Minister’s Office cannot be commanding an ever-increasing number of individual measures forever. There are governments with strong MOIs (or equivalentministries) such as Japan, Taiwan, Singapore, and Malaysia and governments withweak MOIs such as Indonesia, Vietnam, Tanzania, and Mozambique. It is essentialthat MOI’s capacity and functions are reinforced, especially in implementing concrete
programs and projects. It is our hypothesis that much of the cross-country differenc52

Basic Direction

es in industrial performance is explained by policy quality. The quality of industrial
policy must be institutionalized in MOI rather than relying on the personal quality ofa national leader.
More specifically, we suggest the following assignment strategy. During GTP II(and possibly GTP III also), the Prime Minister’s Office should directly manage FDI
and industrial park policies. This will break institutional barriers and place the country
firmly on track toward FDI-led industrialization. Meanwhile, MOI should strive todeliver results in other “core” policy measures that strengthen domestic capability
such as industrial training, kaizen, handholding, fostering manufacturing SMEs, creating manufacturing export champions, FDI-local firm linkage, technology transfer, andtechnical support for key industries (textile, leather, food processing, chemicals, mechanics, etc.) through sectoral institutes and international cooperation. When MOI’s
capability has sufficiently improved, policies such as FDI and industrial parks can be
returned to MOI.
To strengthen industrial policy, we additionally propose that the Ministry of Industry and the Ministry of Trade should be re-united as the Ministry of Trade and Industry (MOTI) as before (or any other name). Joined industry and trade ministries areobserved in Japan, Taiwan, Singapore, Korea, Malaysia, Thailand, and Vietnam. Afterthe merger, new MOTI must be greatly enhanced in all respects including mandate,budgeting, staff capacities, and organizational structure.12 Two ministries may not immediately blend after the merger, but they will gradually integrate as new officials arerecruited and old ones retire.
Another perennial problem observed in many countries is the tax and customs authority (ERCA in the case of Ethiopia) acting on its narrow mandate of securing fiscal
revenue without regards to broader national objectives. This increases costs, hassles,and delays for producers and traders. Industrialization is the national goal and fiscal
revenue is one of the means. The latter should be made to serve the former instead ofcreating obstacles. This cannot be realized only by the self-effort of the tax adminis12

The organizational structure of Japan’s Ministry of Economy, Trade and Industry (METI), Taiwan’s
Ministry of Economic Affairs (MOEA), and Malaysia’s Ministry of International Trade and Industry(MITI) consist of four main components: (i) administrative units handling ministerial, personnel, andlegal affairs; (ii) policy making units which are classified into vertical (sectoral) bureaus and horizontal(cross-cutting) bureaus which together provide core policy functions; (iii) deliberation councils or othermechanisms for interacting with various government and private stakeholders for drafting and executing
policies; and (iv) implementing agencies for SMEs, productivity, industrial estates, quality and standards,
etc. Ethiopia needs to enhance (ii) and (iii).

53

CHAPTER 2

tration; the clear instruction must be given from a higher level.
The National Planning Commission (NPC) was created to draft GTP II in aneffort to strengthen and systematize development planning in Ethiopia. The capacityof NPC staff needs to be built up from a long-term perspective. Furthermore, the existence of a planning commission and national development performance are not reallycorrelated. Some of the Asian governments, such as Korea, Malaysia, India, China,
Thailand, Indonesia, and Vietnam, have used central planning mechanisms to draft development plans but economic results were varied (by now Korea and India have abolished such mechanisms). Post-World War Two (WW2) Japan, Singapore, and Taiwan
did not rely on central planning. If NPC is to produce development plans with proper
direction and high implementability, it must improve vision and goal setting, researchfunctions for macro, sectoral, and social issues, and guidance and coordination overline ministries. International best practices should be referenced to strengthen NPC.
Other areas that need to be studied over the long run include the following.
– Legal status, authority, standing within government, and scope of work of NPC– Organizational structure, appointment of the commissioner, and staff recruitment– Concrete drafting procedure (drafters, duration, sequence, stakeholder involvement, inter-ministerial coordination, approval process, etc.)– Document—length, structure, content, and methods of dissemination– Budgeting, international cooperation, foreign members and advisors, etc.
Should NPC internalize the think tank (research) function, or should it outsource
it? Both strategies are possible. Even if policy research is outsourced, NPC must retain
high research capacity so it can effectively initiate, organize, and evaluate outsourced
research. We believe the pragmatic path will be to gradually strengthen internal research capability of NPC while some (most, at the beginning) of the background papers are commissioned out. By providing proper instruction and healthy competition,
NPC can create a market for high-quality policy research within Ethiopian academic
circles. The Ethiopian Development Research Institute (EDRI), universities, research
institutes, economics associations, and private consultant firms should all participate.
Taiwan offers an interesting case where the all-powerful Ministry of Economic Affairs
set up two think tanks—Taiwan Institute of Economic Research (TIER) and ChungHua Institution for Economic Research (CIER)—which currently operate as private
institutes and compete for MoEA’s policy works. Both TIER and CIER produce
high-quality inputs that go into Taiwan’s economic policy.
54

Chapter 3

Key Policy Components
In this part, policy components which we believe will become important for Ethiopia in accelerating industrialization are selectively discussed. They are not necessarily exhaustive. The purpose is not to give a general explanation of each policy
component—which is provided in the other volume of the JICA-GDF Report, “CaseStudies of Key Industrial Policy Measures in Asia and Africa”—but to point out main
policy issues that must be considered by Ethiopian authorities in the context of GTP II
and possibly also GTP III.

3-1. Kaizen and national productivity movemen
Japan in general, and the National Graduate Institute for Policy Studies (GRIPS)
and JICA in particular, are proud and happy to see Ethiopia learn, internalize, and own
kaizen. We do not doubt the seriousness of Ethiopian kaizen movement. Prime Minister Hailemariam once stated that “the kaizen fire has already been ignited and no one
can stop it,” and we believe it is indeed the case. JICA’s cooperation taught kaizen to
30 pilot companies (Phase 1, 2009-2011) and trained Ethiopian experts and enhanced
Ethiopian institutional capacity to carry on kaizen (Phase 2, 2011-2014). Throughthese phases, 249 firms adopted kaizen and 409 Ethiopian experts were trained. By
now, basic kaizen such as 5S, muda elimination, equipment layout, and quality control can be coached and practiced by Ethiopians alone; Japanese experts are no longer
needed there. JICA is continuing with Phase 3 which aims to transfer advanced kaizen
to Ethiopia. We hope Ethiopia will become a solid African model of kaizen, teach thepractice to other nations, and spread it throughout the continent. Kaizen training ofother African countries by the Ethiopian Kaizen Institute (EKI) has already started.1
Vision 2025 must be attained by the brain and hard work of the Ethiopian people
1

There are three stages of JICA’s kaizen assistance. The first is improving a certain number of factories,
hospitals, or offices by dispatching JICA experts with no continuation or national ownership after thework is done. The second is training local kaizen experts and creating local institutions so kaizen willcontinue after JICA experts leave. The third is broadening kaizen to entire firms, citizens, and public servants so it becomes a part of permanent national culture, and the country may even become an instructor
to others. Most countries stop at the first or second stage but Ethiopia is moving rapidly to the third stage,as Singapore did in the 1980s and 90s.

55

CHAPTER 3

leading to the structural transformation of the economy, not by a mineral discovery orother unearned advantage. This means that Ethiopia should become a middle income
country with quality, with a prospective to become a high income country in the future. For this purpose, the nation should concentrate first and foremost on productivity
improvement during the GTP II period, building on and expanding the past achievements and institutional preparations. While kaizen is not the only way for improving
industrial competitiveness, it should be featured as the key policy tool in GTP II and
GTP III now that Ethiopia has already started on this path. Kaizen-based productivity
movement should be the central pillar of Ethiopian industrialization.
This upbeat assessment and high hope do not however mean that Ethiopian kaizen is going smoothly. On the contrary, there are many important issues that need to be
discussed, solved, or strengthened as Ethiopian kaizen moves up to a more advanced
stage. We would like to list six points.
First, kaizen must be truly owned and practiced by all Ethiopians, not just by asmall number of government officials or factory managers. The Ministry of Education
should introduce programs and school curriculums for efficiency and discipline. Thisshould include reforms in pre-work standard education from kindergarten to university
as well as adult education for farmers, workers, women, youths, etc. Basic efficiency
principles such as attentiveness, honesty, punctuality, good arrangement, and upward
mobility should be taught to all children. Adults should learn planning, cooperation,
elimination of muda, immediate reporting of and attending to problems, etc. Changing
the mindset of entire population is a formidable task requiring many years but it will
surely expand the base of the pyramid upon which more challenging kaizen can bebuilt. In Addis Ababa, taxi drivers have already heard of kaizen; now they must own
and implement it. Theory must be put into practice.2
Second, a kaizen skills certification system must be in place. GTP II will probably
list numerical targets for kaizen experts and kaizen-practicing companies for 2020 and
2025, which is highly welcome. But numerical targets require an official certification
system with transparent criteria to recognize different levels of kaizen achievements.
We believe EKI and JICA’s Kaizen Phase 3 will work on this. When Ethiopia’s kaizen
2

56

The two Prime Ministers we have had the honor of having policy dialogue with both stressed that kaizen
should be a trigger for a deep and permanent attitudinal change, not a toolbox for quick results. Ethiopia’s kaizen awareness has risen considerably but it is mainly directed to the “usefulness” of kaizen as a
productivity tool and not to spiritual awakening. To shift the balance of awareness from the former to thelatter will require a national movement with necessary components as discussed in this section.

Key Policy Components

criteria are established, numerical targets in GTP II may have to be revised as necessary. One possible problem is the fact that something like globally common kaizen
standards already exist but details often differ depending on experts. Each Japanesekaizen expert has ideas about required steps and skills which are slightly different
from each other. Standardization and local adaptation must be attained simultaneously, with variations coming from country specifics rather than experts’ personal opinion. The National Kaizen Council, with inputs from JICA and EKI, should straighten
this matter.
Third, incentivization is critical. Success of a national kaizen movement critically depends on incentives for all stakeholders to carry the torch. This includes workers, mid-level technicians and engineers, top managers, as well as consultants andinstructors at kaizen-assisting institutions such as EKI and TVET. We hear from one
kaizen-award winning Ethiopian company that its workers are not really willing tocontinue because they see only temporary praise but no financial reward. We also
realize that retaining trained experts is a big headache for EKI. Incentivization of various kaizen stakeholders should be seriously discussed at the National Kaizen Council.
Suggested solutions include skill-based and experience-linked remuneration and promotion, official provision of consultancy opportunities, conferring academic degrees,and social recognition through publication and media.
Fourth, Kaizen Month must be continued at least for the coming several years or
until Ethiopia feels confident that kaizen is part of irreversible national culture. We
greatly appreciate the quick initiation of Kaizen Month in September 2014 despite ashort preparation period, and the second Kaizen Month was organized in 2015 withthe attendance of the Prime Minister featuring an award ceremony, the kaizen mastercourse graduation ceremony, and an official inauguration of the kaizen plan in thenext five years and advanced kaizen, all taking place on September 19, 2015, followedby month-long media events. A meeting of the National Kaizen Council, seminars,
and some dancing and singing can also accompany. We hope that the annual kaizen
speeches of the Prime Minister will be made available in visible and easily retrievable
form in websites and publication as a historical record for future reference.
Fifth, kaizen must be privatized in the long run. At the start, kaizen can be initiated, expanded, and institutionalized by the strong hand of the government. Throughthis process, it is hoped that Ethiopian people and companies will be convinced of
the value of kaizen and become willing to carry on rather than being forced to do it.
57CHAPTER 3

When this psychology is firmly established, kaizen can be passed on to private hands
in proper steps. This includes companies, schools, and hospitals willing to do kaizen
without official prodding as well as emergence of private kaizen consultants offering
service on a fee basis. In Singapore, the national productivity movement in the 1980s
went through Awareness, Action, and Sustainability stages. In Singapore, sustainability meant passing kaizen from government to the private sector. Ethiopia is currently
doing Awareness and Action stages but Sustainability should also be kept in mind.
Sixth, while EKI is the hub agency for kaizen, Ethiopian Management Institute(EMI), Civil Service University, National Research Institute, Meles Zenawi Leadership Academy, and other policy-oriented research institutions, as well as the army (asSingapore did), should be mobilized for deepening and broadening kaizen. The modern and spacious facilities of EMI in Addis Ababa can be a venue for incorporatingkaizen into standard management training. The Civil Service University is a naturalplace to teach efficiency to a large number of government officials. The army is similarly an ideal place to teach efficiency and discipline to young males. Meanwhile,academic institutions can analyze kaizen and its adaptation to Ethiopia. In the end, kaizen and enterprise management should be integrated, and research should effectively
communicate the knowledge of kaizen to all interested people in and out of Ethiopia.
In January 2014, Prime Minister Abe announced establishment of an industrial
human resource development center (“TICAD Human Resource Development Centre
for Business and Industry”), the first such center in Africa, in Addis Ababa with EKI
serving as the base. This initiative is a natural development of JICA’s kaizen support
in Ethiopia and should become fully operational during GTP II. Japan should continue
to support the knowledge and infrastructure components of this initiative. Official inauguration of the Center, appointment of its Director and staff, and allocation of initialbudget should be followed by the teaching and dissemination of industrial humanresource capability to other African countries with kaizen as the core curriculum butwith possible addition of other subjects.

3-2. Industrial parks
Ethiopia has chosen industrial parks as the current pillar of industrial policy.
They are considered necessary to provide comfortable investment climate to attract
quality FDI. Fencing small areas to offer good support and services to foreign firms,
when general business climate cannot be improved immediately, is a standard strate58

Key Policy Components

gy. Starting in 2013-2014, industrial park policy in Ethiopia was upgraded from theministerial to the prime minister’s level with significant strengthening of related laws
and regulations, organizations, staffing, budget allocation, policy measures, and policy
attention. There are many ways to accelerate industrialization, and industrial parks are
just one of them. However, developing country governments cannot adopt all policies
at once. The Ethiopian choice of creating good industrial parks as a first step is soundand practical even though it is not the only one. This gives a sharp focus and clear
monitoring criteria. The policy is also quite appropriate for a country beginning toreceive a large amount of manufacturing FDI.
We support the government’s plan to mobilize all necessary measures, institutions, and resources around this strategy to make industrial parks successful. At thesame time, industrial policy in Ethiopia, though evolving dynamically, is still in anembryonic stage. Ethiopia should continue to learn to make its industrial zones more
attractive and fully functional through experimentation and foreign support. Below,
issues directly related to industrial park construction, management, and operation are
discussed while other issues, such as improving general investment climate and creation of industrial areas reserved for Japanese firms, will be considered in other sections.
The first point we would like to make is that industrial parks are a real estate business with inevitable ups-and-downs and factors beyond the control of park operators
or a host country. Success depends much on good luck because many critical determinants of FDI inflow such as global business conditions, regional political instability or
economic crisis, wars and terrorism, cross-border epidemics, economic conditions ofsource countries, and strategies of competitor countries and individual FDI firms arebeyond the power of any single country or government. If these conditions are favorable just when an industrial park becomes operational, it will soon be occupied. Otherwise, it will have to wait for customers. For this reason, quick sales of factory spaceand rental factories cannot be ensured by well-prepared policy or business strategy
alone. In Vietnam, Thang Long Industrial Park Phase 1 (developed by Sumitomo Corporation) and Nomura-Haiphong Industrial Zone (developed by Nomura Securities)
took as long as a decade or more to fill, but both are now very successful with many
Japanese tenant firms. In Cambodia, Phnom Penh Special Economic Zone (PPSEZ)
established in 2006, also took a long time and much marketing effort to sell, but it has
now become the largest concentration of Japanese manufacturers in that country.
59CHAPTER 3

We are a little afraid that Ethiopia has not learned the hard lesson yet. The firstindustrial zone developed by the Ethiopian government (Bole Lemi 1) was sold out
immediately, and Hawassa is also going very quickly. This may be partly due to dynamic policy and partly due to good luck—given the poor investment climate and theabsence of industrial zones in the past, there was a pent-up demand for industrial land
in Ethiopia. An accelerating exodus of light manufacturing from high-wage emerging
economies also helped. But reality is that excess demand for industrial land does notlast forever and investors who promised to come do not always come. We hope that
Ethiopia will not become complacent and will instead double its effort to improve thequality of existing and future industrial zones.
Second, infrastructure services in and around an industrial park must satisfy
global (and Japanese) standards. At the basic level, this includes cleanliness and tidiness; reliable power and water supply; sufficient roads and space for transport andloading/unloading; high-standard waste water and solid waste treatment; protection
against violence, theft, and fire; proper drainage (if the terrain is prone to flooding);
high-quality internet and telecom service at reasonable cost; housing and dormitories
for workers; and so on. These should be commonly demanded by all investors regardless of sector or nationality. In addition, firmness of ground (piling is required if soil
is soft); stability of power voltage and water pressure; and on-site provision of a bankor ATM, courier service, a medical clinic, a supermarket, and restaurants are needed
to attract picky investors. Amata Nakorn Industrial Estate in Thailand, which has attracted about 400 Japanese manufacturers, has comfortable living quarters, Japaneserestaurants, schools, a clinic, and even a golf course inside the estate.
Another problem is what you see (on the blueprint) may not be what you get.
Infrastructure works at industrial zones in many countries—ground preparation, shed
construction, a transformer station, waste water treatment, etc.—are fine in approved
design but actual results fail to satisfy tenant firms because contractors do not follow
instructed design or procedure and/or substitute with less or inferior materials. There
should be a monitoring mechanism to avoid this situation.
Ethiopia should first ensure the quality of basic infrastructure services, then proceed to offer additional ones. Even Bole Lemi 1 may need enhancement. In October
2015 when we last inspected, pavement materials and debris were scattered on industrial zone roads and sidewalks; a concrete cover of underground drainage was broken;
the main gate was unusable because a connecting road to outside was unfinished;
60

Key Policy Components

and the back road currently used by all investors and visitors remained rough andunpaved. From a Japanese eye, these problems should have been fixed before Bole
Lemi 1 opened for business. Also, the management office complex is not exactly what
we expected. At Dong Van 2 Industrial Zone in Ha Nam Province of Vietnam where
about 40 Japanese firms operate, power failure is rare but Japanese manufacturers still
complain about voltage fluctuation and instantaneous power interruptions which damage sensitive equipment. They also want improvement in water quality; undergroundwater supplied to Dong Van 2 meets the Vietnamese environmental standard but not
the Japanese. To correct the situation, JICA has a plan to assist building a new water
plant from a surface water source. One Japanese firm complained about low waterpressure, which was corrected by adding a new pump.
Third, one-stop investor service must be truly helpful. It must provide good support before, during, and after investors move in. Most countries set up one-stop windows or services but they often remain in names only. When investors approach them
there is still considerable bureaucracy, ambiguity, and waiting. Vietnamese officials
joke that there is one door but many locks hang on it. By contrast, at industrial parks
operated by Taiwanese or Singaporean companies, the “Customer-Is-King” attitude isfirmly established. Sudden visitors without appointment are greeted immediately withsmile and tea, and park staff will be more than happy to provide any information that
potential investors or even academic researchers require.
Table 3-1 lists standard services offered by a Japanese industrial park management company to Japanese corporate tenants—in this case, Long Duc Industrial Parkin Vietnam developed and managed by Sojitz Corporation. On the receiving side, Table 3-2 presents Ten Pledges made by the top leaders of Ha Nam Province, Vietnam
to attract Japanese manufacturing and SME investors. These pledges guarantee thequality of infrastructure services as well as investor support. Both cases offer directchannels for receiving claims and coping with emergencies (Japanese staff on duty,
Japan Desk, 24-hour hotline, etc.) Both also hold regular meetings with tenant firms
to systematically share information and solve problems. The Long Duc Industrial Park
management provides information on changes in taxes, laws, and regulations as wellas wage issues. Ha Nam Province meets with Japanese investors a few times a year
where collected investor complaints are studied ahead of the meeting and the Party
Secretary (provincial leader) announces proposed solutions.

61

CHAPTER 3

Table 3-1. Industrial Zone Services Offered to Japanese Investors
Before moving in• Prepare documents for corporate registration on its behalf.
• Obtain company seal and tax codes.
• Assist conducting Environmental Impact Assessment.
• Advise on obtaining visas, work permits for Japanese.
• Introduce real estate agent.
• Introduce accounting firms, law firms, etc.
• Assist loca staff recruitment.
• Provide support to any issues whenever possible.
After moving in• Professional management by Japanese staff always on site.
• Stable supply of power and water, operations of a wastewater treatment system
around the clock.
• Staff recruitment center (located within the industrial park).
• Provide and coordinate various services (IT, logistics, lunch box delivery & catering,etc.)• Exchange and share latest information on new laws and regulations, staff wage, coping with labor disputes, tax issues (personal income tax, etc.)• Organize social gathering, parties, golf competition, etc.
Source: Izumi Ohno’s research and information provided by Long Duc Industrial Park, Vietnam developed
and managed by Sojitz Corporation.

Table 3-2. Ten Pledges of Ha Nam Province, Vietnam to Japanese
Investors
WE GURANTEE
1. Sufficient and stable power supply (24 hours).
2. Good infrastructure (water, sewerage, internet, banks, etc.).
3. Free provision of land to be used for dormitories for workers (outside the industrialpark).
4. Efficient administrative procedures (investment license to be approved in a few
days).
5. Sufficient labor supply, developing a university town (1,000 ha secured for universities relocating from Hanoi).
6. Facilitating procedures for setting up and operating companies, tax incentives, andsubsidies for training Vietnamese staff.
7. Public security and safety for companies.
8. Flexible administrative response to accommodate unanticipated changes in investors’ business plans.
9. Prevention of strekes (local and foreign companies).
10. Hotline to Japan Desk for any troubles (by assigning Japanese–speaking staff).
Source: Izumi Ohno’s research and information provided by the People’s Committee of Ha Nam Province.

62

Key Policy Components

Additionally, Japanese manufacturing SMEs require even more pampering andspecial attention in comparison with large corporations. It is widely known that SMEs
that supply precision components with QCD (strict requirements on quality, cost, anddelivery), not big-name automotive or electronic giants which buy and assemble suchcomponents, are the true source of Japan’s high technology. However, small manufacturers lack capital, management capacity, marketing skills, and foreign experiencedespite their high technical capacity. From around 2010, Japanese central and local
governments as well as various economic organizations (including JICA and the Japan
External Trade Organization (JETRO)) began to actively support overseas expansionof Japanese manufacturing SMEs. This includes business information, trade fairs andtours, management consultation, finding customers abroad, recruiting staff and workers, matching and linking with foreign partners and service providers, financial support for feasibility study and pilot projects, and so on.
Together with Japanese consumers, Japanese investors are perhaps the choosiest
in the world. They want super-care not demanded by other international investors.
But if Ethiopia wants to create very good industrial parks, listening to the voices ofJapanese and other hard-to-please foreign investors and implementing their recommendations—selectively and in proper sequence—is a reasonable strategy. Japan inturn should offer systematic expert opinions on the infrastructure services and investor
support at the existing industrial parks in Ethiopia.
Fourth, in order to attract high-quality manufacturing SMEs, Ethiopia should offer various investment options. For the moment, large-scale, stand-alone, and often
vertically integrated garment and footwear investors such as Ayka, George Shoe, Huajian, and Kanoria attract attention. Similarly, the PVH subcontracting group is coming
to Hawassa, each with relatively large factory space. They are expected to contribute
greatly to the next stage of Ethiopian industrialization. But when a latecomer country
advances from simple light manufacturing to mechanical production such as automobiles, electronics, industrial equipment, and their components, a complex web ofcomponent suppliers and service providers become crucial (they are called supporting
industries in East Asia). These industries require hundreds and thousands of precisionparts whose specifications change frequently. Unless suppliers are located inside ornear the country where final assembly takes place, time and logistic costs become formidable, and just-in-time production at globally competitive price is hardly possible.
Japanese manufacturers have already established such a network in East Asia, and63

CHAPTER 3

Thailand alone has about 2,300 first-, second- and third-tier automotive component
suppliers the vast majority of which are Thai firms. That is one of the reasons why
Japanese firms—both assemblers and component suppliers—are unwilling to movefrom there to Africa or elsewhere.
Manufacturing growth without reliable supply of inputs and services tends to beshallow and transitory. A deep and multiple layers of manufacturing SMEs is needed to maintain competitiveness of final assemblers. Large multinational corporations(MNCs) will not come or leave the country soon if strong industrial clusters do notform. Thailand and Vietnam noticed this, and have been promoting supporting industries since the 1990s (Thailand) or the 2000s (Vietnam). Mr. Mai Tien Dung, theParty Secretary of Ha Nam Province, says “We target Japanese supporting industries
and SMEs because they will bring large MNCs.” The fact is that large assemblers andsmall suppliers present a chicken-and-egg problem. Existence of one will attract theother, and the question is how to first attract either of them. To attract the chicken,
hard and customized negotiation with targeted MNCs is advisable. To attract the egg,
various options to minimize initial cost and risk of SME investors should be offered.
Because manufacturing SMEs do not need large sheds over 1 hectare, other possibilities to enter small should be available. Original Equipment Manufacturing (OEM),line gari (renting a production line of an existing factory), license manufacturing,small-size rental factories (250m2, 500m2, 1,000m2, etc.), even smaller “incubation”
space (100m2, for example), investment in a group, nokisaki arrangement (renting unused factory space to others for a limited time), and joint venture with a reliable local
partner are common options for reducing or entirely doing away with initial investment of Japanese SMEs in Southeast Asia. As business expands, they usually movefrom incubation space to a rental factory, then build their own factories. Others startfrom line gari or OEM to explore market possibilities, then proceed to full investment.
There are many small Japanese manufacturers that grew to become large firms in East
Asia.
Finally, the problem of FDI data should be mentioned. We understand that theEthiopian government only counts implemented and operational FDI and does noteven report the number of registered projects which may or may not invest. Mr. Fitsum
Arega, Ethiopian Investment Commissioner, states that actual inflow (implemented
FDI) was $1.0 billion in 2013/14 and $1.5 billion in 2014/15. We approve EIC’s effort
to recognize only serious investors and not opportunistic license hunters. We also64

Key Policy Components

highly evaluate its recent move to eliminate ghost investors from the dataset, create
teams that follow up and assist key investors until they become operational, and nudge
license holders to quickly implement in what they promised. We see that the lessons
learned in Malaysia and elsewhere are put into practice.
Nevertheless, after many inquiries and interviews, we are still unable to fully
grasp Ethiopia’s FDI statistics. The fact that there is no consistent time-series data
going back to the 1990s is understandable, but even current numbers puzzle us. There
are two issues here. First, besides implemented FDI, other information should be provided. In East Asia it is common to regularly report the number of projects and USD
values of FDI registered, implemented, and cancelled. FDI registration can even bereported monthly with the full understanding that not all registered projects will be realized. Moreover, information on size, sector, and nationality of investors is also madeavailable. With this array of information, it is easy to analyze shifts in the implementation ratio, type of investors, distinction between serious factories and window-shoppers, the areas to which policy attention should be directed, etc. Second, as Ethiopia
improves FDI reporting in an experimental and incremental way, it is desirable tocheck if the Ethiopian practice is compatible with global standards. Data compatibility
is necessary to compare Ethiopia’s FDI performance with other developing countries.
Professional help, from the International Monetary Fund (IMF)’s Statistical Department for example, should be sought for diagnosis and advice. Data quality is a criticalmatter for setting goals and monitoring progress toward the 2025 vision.

3-3. Linkage formation
Business linkage can mean many things and can be formed by various partners.
Here we focus on commercial cooperation between FDI manufacturers and domestic
firms where the latter supply industrial materials, components, and services to theformer on a regular basis. Additionally, linkage formation with foreign buyers thatdemand high quality on domestic suppliers as a condition of purchase is also worth
considering. In such vertical linkages, technology transfer may occur through standardizing, demanding, teaching, training, and other instructions. This is creation of“supporting industries” mentioned in the previous section.
FDI-local firm matching may occur spontaneously through private channels but
the amount of such activities is usually much lower than what policy makers hopefor. Thus, official support is needed to accelerate and maximize match-making. After
65

CHAPTER 3

attracting high-quality foreign investors to the home country, linkage can be promoted by (i) direct service provision by the state such as creating information datasets,
and hosting events and opportunities for two parties to meet, know each other, andhopefully engage in business; and (ii) incentivization, namely providing subsidies andother supports to qualified private activities that promote matching, teaching, local
procurement, and technology transfer.

Linkage promotion in Thailand
In our opinion, Thailand offers a very good—though not perfect—matchingmechanism for other latecomers to study and selectively follow. Since the mid-1980s,
Thailand has introduced a large number of supporting industry promotion programs,
among which FDI-local firm industrial linkage development is one. Table 3-3 lists
main players in this mechanism.
There are three salient features of Thai matching and linkage promotion. First, thenetwork is informal and flexible rather than rigid and hierarchical. While the Boardof Investment (BOI, an investment agency under the Prime Minister’s Office) and theMinistry of Industry (MOI) are the key official coordinators, no institution dominates
nor is the system governed by explicit rules. Each member organization performs its
tasks separately and refers clients to other institutions when necessary. Personal rapport among officials and experts at various institutions matters greatly in ensuring
speedy and effective service. Such loose working style is typical of the Thai government. Second, the private sector plays a significant role. Some Thai industrial NPOs,
such as the Technology Promotion Association (TPA) and the Thai-Nichi Instituteof Technology (TNI), are self-supporting private bodies receiving little government
help while others, such as the Thailand Automotive Institute (TAI) and the Alliancefor Supporting Industries Association (A.S.I.A.), are established and coached by MOI
until they become fully operational and effective. Third, management, technical, andfinancial support to SMEs are to be integrated, or at least that is the intention of Thai
MOI. Shindan reports (SME diagnostics and advice) are now required for the Bureauof Supporting Industries Development (BSID)’s technical support or SME Bank loans
so manufacturing SMEs have an incentive to receive shindan in advance. TPA plans
to combine firm matching service with technical support to Thai SMEs so they will
become competent partners of Japanese firms, with the Technology Advanced Metropolitan Area Cluster (TAMA Cluster) of Tokyo as a model.
66

Key Policy Components

Table 3-3. FDI-Domestic Firm Linkage Promotion in Thailand
Organization

StatusFunctions

DIP (Department
of Industrial
Promotion)

Government; MOI’s
leading department

Design policies; monitor implementation andanalyze performance

BSID (Bureauof Supporting
Industries
Development)

Government; estab.
1996; one technicalbureau of Thai MOI

Provide technical support & training to Thai
supporting industries; develop prototype
products; promote subcontracting, shindan,
and industry associations

BUILD (BOI Unit
for Industrial
Linkage
Development)

Government; estab.
1992; one unit of theBoard of Investment(central FDI agency)

FDI-Thai firm matching including Vendors
Meet Customers (VMC) program, supplier
database (with ASEAN), SUBCON Thailand(annual subcontracting exhibitions)

TAI (Thailand
Automotive
Institute)

NPO; estab. 1999 by
MOI but now selffinancing; one of 10
industrial institutes

Automotive policy research and masterplan drafting; promote supporting industry
clustering; export promotion; automotive
testing center

A.S.I.A. (Alliancefor Supporting
Industries
Association)

Private; a collection of
twelve Thai industrial
associations

Information exchange, technology learning,
and receiving policy support for member
associations and firms; coached by MOI

TPA (Technology
Promotion
Association)

Private NPO;
estab. 1973 by Thaialumni who studied
engineering in Japan

Offer technical & management courses;
conduct business consultation; publish &translate books; teach Japanese language(all fee basis)

TNI (Thai-Nichi
Institute ofTechnology)

Private university;
estab. 2007 by TPA

Teach Japanese style manufacturing in boththeory & practice (engineering, IT, businessadministration, MBA); 4,000 students; active
cooperation with Japanese FDI

Japan Desks (twodesks at DIP and
BOI)

Government; staffedby Japanese experts

Appointments, events, and logistic support
for Japanese SMEs and local governments
visiting Thailand for business partnership

Source: Research by the GRIPS Development Forum and the Vietnam Development Forum in 2005,
2009, 2013, and 2015.

BSID and the BOI Unit for Industrial Linkage Development (BUILD) deserve
special mention. The Director of BSID is Mr. Panuwat Triyangkulsri, an experienced
industrial official who speaks fluent Japanese. He has been instrumental in developing
Thai supporting industries since the 1980s. BSID has taken a step-by-step approachto strengthening the capacity of Thai industries. Initially, when the private sector was
weak and the number of supporting industry firms was limited, BSID directly provided
technical and managerial support. When the number of firms grew to approximately
1,000, BSID established and managed thematic forums of supporting industries (de67CHAPTER 3

sign, metal, machinery, foundry, etc.), serving as their coach and secretariat. Gradually, these forums gained experience and developed into 12 privately-run industrial
associations.3 They are beginning to provide technical support and training to member
companies without BSID’s help. In 2008, A.S.I.A. was established, again with theguidance of BSID, to promote networking among existing industry associations. Currently, BSID, industrial institutes such as TAI, A.S.I.A., and A.S.I.A.-affiliated industrial associations jointly work to strengthen supporting industries.
Likewise, shindan (SME management consultant system) service was initiallyprovided by the government, but now it is willingly conducted at individual firms thathave come to understand its benefits. The current role of BSID in shindan is setting thediagnostic criteria and establishing a mechanism in which shindan reports can be usedeffectively to address concrete problems. As noted above, Thai companies are obliged
to present shindan reports in applying for BSID’s technical support or loans from the
SME Bank. BSID also manages a database for Thai supporting industries. In this way,
the degree of Thai government’s direct involvement in enterprise support was strong
at first, but has decreased over time as the private sector developed its capacity.
On the other hand, the objective of BUILD is to provide one-stop services for FDI
firms wanting to procure domestic inputs or find Thai partners for joint venture, OEM,
patent use, or production contract. Main activities of BUILD are as follows.
(i) Sourcing service―when an inquiry is received from a foreign buyer, the
BUILD website solicits expression of interest from potential Thai suppliers.
One-on-one meetings can also be arranged. Inquiries from foreign firms arereceived via email, telephone, the One Start One Stop (OSOS) Investment
Center, or overseas offices of BOI.
(ii) SUBCON Thailand―started in 2007 and held annually, this is the largest
industrial subcontracting exhibition for industrial parts and business matchmaking in the Southeast Asian region.
(iii) ASEAN Supporting Industry Database (ASID)—this is an information service of the Association of Southeast Asian Nations (ASEAN) that lists
manufacturers of parts and components in the ten member countries on
3

68

Thai Machinery Association, Thai Composites Association, Thai Foundry Association, Thai Embedded
Systems Association, Thai Plastic Industries Association, Thai Logistics and Production Society, Thai
Tool and Die Industry Association, Thai Air Conditioning Traders Association, the Association of Thai
Software Industry, Thai Subcontracting Promotion Association, Hazardous Substance Logistics Association, and the Association of Thai Small and Medium Entrepreneurs.

Key Policy Components

the internet for global access. Thailand is the most active country in thisdatabase.
(iv) Vendors-Meet-Customers (VMC) Roadshow―this program supports Thai
component suppliers to participate in overseas trade fairs for widening
knowledge and possible link with global supply chains.
BUILD is run by one director and ten staff members, with each staff assuming responsibility for sourcing service for different individual buyers. According to
the BUILD Director, business matching is not an easy task with partner search moredifficult than procuring local inputs. It sometimes takes more than one year to locate
suitable partners. BUILD does not have data on the number of buyer inquiries or thenumber of successful search. However, about half of the FDI firms that made inquiries
subsequently send a thank-you email and report progress to BUILD.
While the Thai model has a long history and many experts and institutions, andcannot be copied immediately, Ethiopia should start with what it can do. The government should prepare a list of competent Ethiopian firms—component suppliers,
producers and distributors of agro inputs and raw materials, service providers, etc.,
just as building contractors are graded. This may take the form of an enterprise database or, more informally and realistically, prompt and precise information provided by
EIC, MOI, Ministry of Agriculture (MOA), EKI, TIDI, LIDI, MIDI, EHDA, etc. An
information referral and matching network should be set up among these institutions.

Technology transfer
Technology transfer is not a natural or automatic phenomenon. It calls for serious effort by domestic entrepreneurs to connect and work with foreign firms as wellas effective official actions to facilitate and incentivize the learning. Policy should
use incentives, subtle prodding, and encouragement instead of forcing FDI to transfer
technology by laws, regulations, and penalties because such coercion usually backfires and keeps FDI away. Only China, with its gigantic domestic market, can demand
technology transfer and still attract FDI. Normal-size countries should not take thisapproach. Ethiopia should learn how to push FDI softly to teach skills and technology
in a voluntary and mutually beneficial manner. This requires thorough understandingof the objectives and behavioral patterns of FDI as well as alignment of their profit
motive with national development goals. This is a subtle and difficult policy path that
Ethiopia should master.
69

CHAPTER 3

Moreover, WTO prohibits requiring FDI firms to procure locally produced partsand materials as a condition for receiving incentives. Even so, import substitution is
an important policy objective for latecomer industrialization and should not be entirely ruled out. Exactly what is prohibited and how much is allowed under WTO is
often unclear and depends much on technical and political factors. Violation is notofficially recognized unless the country is sued and loses at the WTO Dispute Settlement Court. International politics, including mutual non-accusation among violating
countries, is also at play. Many countries engage in grey and even black activities with
impunity. Under such circumstances, what strategy a non-WTO member like Ethiopia
should take is complex and controversial. Former Prime Minister Meles requested
major investors and project donors to procure local goods, services, and labor as muchas reasonably possible and also train engineers. Such persuasion and encouragement
without legal obligation may still work in enticing FDI firms to make effort in the desired direction. We recommend that promotion of local procurement and technology
transfer should be soft, indirect, and well-arranged rather than legal, direct, and ad hoc.
The kind of technology transfer that Ethiopia should seek is not invention orcommercialization of frontline technology, be it fuel-cell cars with automatic drive or
new medicine based on latest bio-medical research. High-tech, bio-tech, nano-tech,internet of things (IoT), and other fancy terms should not be randomly thrown into
plan documents. For latecomer countries, putting globally known non-proprietary(and free-of-charge) knowledge into practice, and using acquired skills to link with
FDI and participate in global competition and value chains are the most meaningful
objective. This will improve quality and productivity, reduce cost, and ensure prompt
delivery. A country should master such basics first before attempting to innovate andcompete with advanced scientific research. It is difficult to talk about innovation whenfactories are scattered with unused materials, university graduates are not equippedwith knowledge required by industry, or firms do not keep proper books or pay taxes.
Japanese firms are willing to teach if local partners seriously want to improve
QCD (quality, cost, and delivery) and become their reliable suppliers. Such cases
abound in East Asia. Toyota, Denso, Honda, and Nissan trained Thai automotive parts
makers in Toyota Production System, manufacturing management and skills, moldand die technology, and the skill certification system; Colgate and Sanyo coached
Vietnamese plastic injection firms for producing parts with quality; a fishery company
taught how to produce high-quality frozen shrimp for the Japanese market; and virtu70

Key Policy Components

ally all Japanese manufacturing firms teach and practice kaizen at home and abroad.
All of these cases are “win-win” for both parties, with Japanese firms expanding sales
and profits with improved inputs. It is crucial to identify mutual commercial interests
when technology transfer and skills teaching are promoted. Otherwise, learned technology will remain unused.
What needs to be learned from FDI is not very high-tech. It should start withproper attitude toward work—pride, honesty, punctuality, long-term vision, upward
mobility, pursuit of excellence, customer orientation, safety, and mutual respect. Dynamic management and appropriate information flow must be in place. Target setting,clean environment, labor management, muda elimination, benchmarking, statisticalanalysis, and efficient machine operation and maintenance may be added. Sector-specific technology may be introduced and global marketing skills can be acquired. Management should be attentive to the workers’ rights, welfare, and future career paths.
Government should create mechanisms and opportunities for learning. It should
also provide financial incentives for transferring skills and technology from FDI to
Ethiopian firms. This will require defining eligible training, teaching, and technology
transfer as well as conditions and terms of incentives. Subsidies must be sufficiently
large, say 50% of the training or teaching cost, up to even 80-90% of the cost if they
are for top priority activities or for manufacturing SMEs. Subsidies can be financed bygovernment budget, through ODA, or by setting up a fund, such as the Skills Development Fund in Singapore, where a levy is collected from all firms according to thenumber of workers but firms can reclaim the money when they send their workers todesignated training programs. All of these methods require proper administrative andmonitoring capacity.
A few words about the Metal and Engineering Corporation (METEC) and theEndowment Fund for the Rehabilitation of Tigray (EFFORT) companies may be inorder. They are among the most technically competent firms in Ethiopia because of
their historical background. At the same time, foreign observers often blame them as
government-linked producers benefiting from special privileges and suppressing private firms. This is a very unfortunate situation. EFFORT companies in Mekelle suchas Mesfin and Messebo have basic technology and willingness to learn. If market andtechnical guidance are made available from outside, these companies should be able
to produce quality goods, including industrial and agricultural equipment and small
engines. Would it not be possible to transform them to the global standard of corpo71

CHAPTER 3

rate governance in ownership, management, information disclosure, etc. so foreigners
can no longer complain about their secrecy or official connection? At present the EFFORT website is still primitive in providing corporate information. These companies
are among the best candidates for FDI linkage, and corporate governance reform will
surely improve their chances.

3-4. Handholding
Handholding is a program that offers multi-faceted assistance to a small numberof selected SMEs that show potential. It is also called hands-on or yorisoi assistance(yorisoi in Japanese means staying close as a friend or a helper). Handholding mustsatisfy all of the following conditions.
n It is an officially provided service for SMEs with no or little fee charged.
n A clear business goal (only one) is set in advance.
n There is a screening mechanism to select eligible firms.
n Duration of assistance is 2-3 years (usually non-renewable).
n Multiple and customized help is offered with the content of assistance basedon the diagnosis of and consultation with individual companies.
n A high success rate is expected.
Handholding aims to produce excellent companies rather than just creating jobs.
It is targeted at a selected few rather than available to all enterprises. Government
proactively seeks candidates for strengthening rather than waiting for customers toarrive. It is an advanced and highly labor-intensive program requiring mobilization ofmany experts as well as coordination and monitoring. This type of enterprise support
is widely practiced in East Asia.
In Japan, JETRO annually assists 150-200 Japanese SMEs to break into newexport markets as well as 1,500 SMEs to invest abroad (the latter program started
in FY2012). Abenomics plans to assist additional 10,000 SMEs to export or invest
abroad by FY2017. Japan can help many SMEs simultaneously because it has a largepool of experienced industrial experts willing to work for public purposes through
JETRO, JICA, the Organization for Small and Medium Enterprises and Regional Innovation (SME Support), local governments, or business associations.4 Taiwan’s SME
472

The number of officially certified Japanese shindanshi (SME consultants) was 21,837 as of March 2013.
Apart from this, there are an unknown but much larger number of active or retired industrial managers
and engineers who can coach firms but who are not formally registered as shindanshi. Many of them work
as JICA experts in developing countries.

Key Policy Components

Administration, Korea Trade-Investment Promotion Agency (KOTRA), and Malaysia
External Trade Development Corporation (MATRADE) also provide handholding to
SMEs although the number of assisted firms in Malaysia is still small (24 SMEs per
year for export promotion). These countries can launch new handholding programsby recruiting domestic experts and re-arranging existing functions and programs. The
point is that successful handholding requires a sufficient number of good instructors
and competent organizations already in place.
Each handholding program serves only one pre-set business goal. It may be firsttime export (including creation of champion products), investing abroad, acquiring
technology (including FDI-linked technology transfer), developing a new product, or
becoming a regular supplier to FDI firms and becoming a player in a global value
chain. Taiwan also provides handholding for a group of companies to form a new
industrial cluster at the village or township level. Prime Minister Hailemariam Desalegn inquired about the possibility of handholding for transforming short-term traders into true manufacturers that take risks for long-term investment in technology andequipment. We have not heard of such handholding but the idea may be well worth
exploring in the Ethiopian context. For example, coffee traders may be encouraged to
become a coffee processor with latest technology, quality guarantee, a brand name,attractive packaging, effective marketing, and stable overseas customers. Similarly,
traders and service providers in priority sectors such as garment, leather, and horticulture may be supported to become producers through handholding. Importers anddistributors of metal and plastic products may likewise be assisted.
Selecting candidate firms for handholding is relatively easy if official agents already know the willingness level and potential of all firms through regular contacts
and visits. In Ethiopia, EKI, TIDI, LIDI, and EHDA have such ground informationin respective sectors. Some countries have standardized enterprise evaluation such as
Japan’s shindan system and Malaysia’s SME Competitiveness Rating for Enhancement (SCORE). SMEs may also apply through an open competitive process. After
selection, detailed diagnosis should be done by a management consultant to identify aconcrete goal, a roadmap, problems to overcome, and an assistant program unique toeach firm. Support areas may cover strategic planning, marketing, technology, financeand accounting, use of ICT, linkage, labor management, or information about available official support. A team of two or three experts is assigned to help each SME, withadditional specialists brought in when needed.
73

CHAPTER 3

Handholding is one of the most advanced and labor- and knowledge-intensive
form of enterprise assistance. Because Ethiopia currently does not have a sufficientnumber of industrial experts or functions, handholding needs to be introduced in proper speed and steps without overburdening existing human and institutional resources.
Expertise in industrial assistance must be built up in quality and quantity over theyears, and handholding should be started in a small and pragmatic way using existing
industrial consultative services, to be scaled up later. We propose that, apart fromkaizen, four key policy components for enterprise enhancement should be added in
Ethiopia.
First, management is the basic and most critical factor that determines businessperformance. This covers a wide ground such as (i) basic knowledge of economics
and business, (ii) finance and accounting, (iii) corporate management, (iv) corporate
operations, (v) legal matters, (vi) effective use of ICT, and (vii) knowledge and useof government support measures.5 In Japan, the SME Shindan (diagnostics and advice) System was launched in 1948 and institutionalized in 1952. Key institutions
that support the Japanese Shindan System are the Small and Medium Enterprise
Agency (SME Agency), a state-authorized shindanshi (enterprise consultant) certification mechanism through exams and renewal procedure, SME Universities, and theJapan SME Management Consultant Association (J-SMECA). In Ethiopia, short-term
management courses for entrepreneurs may be available at EMI, universities, and donor-funded projects but comprehensive and systematic management support with aconcrete objective is lacking. Other countries that have a good public-sector SME
consultation system include Taiwan, Korea, Singapore, and Malaysia.
Second, external activities such as marketing, export promotion, customer response and services, cluster formation, business associations, use of ICT, and enterprise matching of various sorts (FDI-local, buyer-supplier, joint venture partners, technology transfer, OEM and production contracts, etc.) is critical. These can be regarded
as part of management functions but they are so important that we prefer to set themapart. Producing what customers want, rather than selling what you produce, shouldbe the norm.
Third, sector-specific technical support must be available. While 5S and mudaelimination apply to all sectors, enterprises also need special technical skills and tech5

74

These seven subjects are those actually given in the Primary (written) Exam for Japanese Shindanshi,
while actual practice of business consultation is required in the Secondary Exam.

Key Policy Components

nology to compete. In East Asia, basic “supporting industry” skills such as die-andmold, welding, machining, casting, forging, pressing, stamping, plating, and heat treatment are commonly taught and learned. Garment firms may want to acquire design
capability and latest dyeing technology while tanneries need to know environmental
requirements for export. Coffee and sesame growers and exporters must be familiar
with WTO’s Sanitary and Phytosanitary (SPS) Measures and food safety standards ofadvanced markets. Ideally, industrial experts from TIDI, LIDI, MIDI, EHDA, and soon, should be able to teach these. If Ethiopian experts are unable to teach at present,
foreign experts must be mobilized to teach these skills and knowledge as well as upgrade the capabilities of Ethiopian institutes.
Fourth, financial support for SMEs must be provided. Here the policy menu isbroad and includes financial incentives for designated activities, soft loans throughpublic financial institutions (SME Bank, for example), two-step loans (public money
channeled through commercial banks), subsidies or quotas on commercial bank lending to SMEs, factoring and leasing, venture capital, credit guarantee, an SME debt resolution mechanism, and an SME credit database. Ethiopia has the Development Bankof Ethiopia (DBE) that finances big projects as well as micro-finance institutions, but
small and medium firms have no place to turn to (the so-called “missing middle problem” 6). Building effective SME financial support is a challenge that usually takes
many years to produce results. Policy effort should be started now with a long-term
perspective.
Our suggestion is that Ethiopia should prepare these multiple supporting functions in fast but realistic pace. At some point during GTP II, a pilot project in handholding may be launched when at least some of these functions become operational.
MOI should be the lead ministry in cooperation with other related ministries and agencies. A few carefully chosen firms should be supported by a joint team composed of amanagement consultant and experts from EKI, TIDI, LIDI, MIDI, etc. A pilot project
should be scaled up later, as usual. Foreign experts may also join the team. Besides Japan, which can provide kaizen, shindan, and sector-specific technology, development
partners such as Germany, World Bank, EU, the Department for International Development (DFID), USAID, and Malaysia may be approached. Bilateral partners should
be happy to introduce buyers in their home markets. Management, foreign informa6

However, we hear that DBE will start lending to SMEs during GTP II.

75

CHAPTER 3

tion, accounting, marketing, quality and safety standards, ICT, etc. can also be assisted
by such development partners. At the same time, it is essential that the Ethiopian side
has a firm grip on and coordinate these activities by foreign experts.
It would be nice to have a database of Excellent Ethiopian Enterprises for facilitating firm matching and linkage as well as choosing candidates for handholding. The
list of good kaizen-practicing firms, the list of productivity award winning companies,
and the list of firms evaluated highly by EIC, TIDI, LIDI, MIDI, EHDA, and other institutions should be integrated. The important thing about a database is regular contact
with nominated firms to update information and assessment. This is a very labor-intensive work. EIC, EKI, TIDI, and LIDI already continuously monitor and support companies in their responsibilities, which is a great asset in Ethiopian industrial policy.
A database need not be high-tech or expensive; an Excel sheet should suffice for the
moment (avoid a donor that pushes fancy software supplied by a home company). It is
more important that Ethiopian officials from one of these agencies can provide up-todate, reliable, and detailed information on any firms on the list to interested investors.
If an initially contacted person does not have the information, the client should bequickly directed to the right place.
More generally, as we look at the policy situation in Ethiopia, basic SME support functions such as management, technology, skills training, export promotion, FDI
attraction, FDI-local linkage, finance, etc. are highly underdeveloped by East Asianstandards, and the number of Ethiopian officials and private experts who can leadand teach them are few. At the same time, we must acknowledge that the Ethiopian
government is clearly aware of this weakness and making great effort to improve itin recent years. Many organizational changes have been made and many new instruments have been introduced.
Ethiopia should continue to build up industrial policy capabilities in human resources and institutions, which will inevitably be a long-term endeavor. At the sametime, it should experiment with new instruments such as matching and linkage, FDIlinked technology transfer, and handholding with existing policy capabilities, startingfrom the simple and basic and gradually climbing the ladder. A possible plan for suchstaged scaling up is suggested in Table 3-4. While handholding is a relatively advanced form of SME support, its introduction in proper pace and sequencing within
an overall plan will surely contribute greatly to the quality and scope of Ethiopian
industrial policy.
76

Key Policy Components

Table 3-4. Scaling Up of Core Industrial Policy Functions: A Suggestio
Funcation

Now

Intermediate solution

Final solution

SME
support

TVET, Femseda Remseda,
System and master plan
are laid out but support
functions remain weak on
the ground

Scale up & enhancequality & scope of
support; start pilot
handholding (HH)

Fully developed SME
support with sufficientexperts, effective
handholding, etc.

Large &
mediumenterprise
support

TIDI, LIDI, MIDI...
(sectoral); EKI (functional)
Support functions underdevelopment

Strengthen existing
institutes; train experts;
improve technology
support functions; startpilot HH

Well-developed sectoral& functional institutes;
handholding for creating
champion companies

FDI
marketing& investor
services

EIC & one-stop service
being strengthened; top
sales; Business Diplomacy
Enhancement under way

Enhance and expand
EIC's functions incl. onestop service, matching,post-investment support

EIC with full functions
accompanied by top sales
diplomacy

Industrial
zones

IPDC created & expanding;BL 1&2, Hawassa, Dire
Dawa, etc. Currently
prioritized

Improve IZ & service
quality; increase private
developers

Quality & quantity of
IZs ensured; less state
involvement

MOI & sectoral institutes
to launch pilot linkage;offer incentives; possible
JICA & HIDA support

Full linkage programs by
MOI & sectoral institutes

Very little up to now
FDI-local
linkage &technology
transfer
Exportpromotion

Build effective export
Export Streeringpromotion policy;
Committee; MOFA, MOI,
integrate & enhance
MOT, MOA; sectoral
institutes; Export Promotion functions under EPA
Agency just formed under
MOT; champion products &national branding

Full-fledged export
promotion with strategic
support & champion
products

3-5. Champion products and national branding
By 2011 at the end of Phase 1 of Ethiopia-Japan Industrial Policy Dialogue,kaizen had been launched successfully and industrial policies of East Asia had been
analyzed. However, kaizen is only one component of industrial policy dealing withefficiency within the confines of factories. The scope of industrial policy had to be
widened. Moreover, great attention of Ethiopian policymakers then was directed tosupply-side concerns—productivity, TVET, technology, investment, industrial materials, etc.—while demand-side issues such as strategic marketing, customer response,and national image building seemed neglected. For this reason, in 2012, we decided tostress the latter aspect and proposed export promotion as the first main topic of Phase
2 of Industrial Policy Dialogue. After studying the experiences of Japan (JETRO),
77

CHAPTER 3

Malaysia (MATRADE), and Thailand (foreign missions), we selected the creation ofchampion products as an entry point for strategic export promotion. Later, national
branding was added. Both were discussed at high levels and supported with concrete
JICA projects. Although champion products and national branding constitute only asmall part of export promotion, they are particularly suitable for elevating the mindset
of Ethiopian stakeholders—manufacturers, service providers, exporters, and agencies
that support them—prompting them to realize the importance of aiming at high quality
and having the pride of making things for global high-end markets. Moreover, that is
the kind of export promotion policy that Japan can teach most effectively.
Many people still remember Ethiopia as a poor, war-torn, and famine-prone country. Although this is an outdated image, popular perception is slow to change. Meanwhile, for investors and developing partners working in Africa, the image of Ethiopia
has already improved significantly in the last several years. This was a combined result of intellectual leadership that Ethiopian top leaders have shown in the global andregional arena, continuous high growth even amid global recession and falling commodity prices, and the recent strong inflow of manufacturing FDI. Proactive industrial policy of the Ethiopian government also has contributed. These unfolding events
have attracted much attention of business media and economic analysts. As long as
Ethiopia’s international and regional leadership, high growth, and manufacturing FDI
remain intact, the investors’ image of Ethiopia will continue to shift for the better.
This is good news but it is not enough. Positive change in perception has been
partial and incomplete. Ethiopia is getting high marks on political stability, cheap
labor, and proactive policy (macro-level enabling factors) but it is not yet praised for
quality, diligence, productivity, creativity, or entrepreneurship (micro-level growth
drivers). The enlightened global business community remains a small circle, and theworld at large still cannot distinguish Ethiopia from the rest of Africa. National image
can be transformed through both evolving events and deliberate policy. To improve
Ethiopia’s image faster and more coherently, the following are needed: (i) broadeningof policy scope and external publicizing from just growth and FDI to infrastructure,agro-products, tourism, services, education, transport, and so on; (ii) relentless pursuitof quality and customer satisfaction in these areas and rejecting low-quality substitutes; and (iii) a professionally guided campaign to advertise current achievements andproject Ethiopia as a newly emerging industrial economy with quality and a model for
African industrialization.
78

Key Policy Components

Existing bright spots of Ethiopia include the Light Manufacturing Vision, Ethiopian Airlines, kaizen experts and national movement, emergence of champion products, arrival of high-quality manufacturing FDI, Addis-Adama Expressway, Frenchwines and strawberries produced in the Rift Valley, export quality roses, great marathon runners, and the construction of Grand Renaissance Dam. These unique featuresof Ethiopia must be strategically combined to project a new national image. Visitors
are often amazed to see these in a country that suffered famine and conflicts in the
recent past. But these achievements are not known to people outside Ethiopia and they
are not presented with a clear connecting message. They must be effectively joined
to generate a perception of an industrializing country with quality, to replace the past
image. This requires a well-planned professional work.
However, we must also acknowledge that excellence is not yet ubiquitous in Ethiopia. Bureaucracy and inefficiency at some (not all) of the state agencies are incredible. Regular procedures such as checking in and checking out at many (not all) hotels
are very slow and full of muda. World heritage sites do not have adequate food, amenities, or transportation expected from foreign travelers. Domestic trade and distribution
systems, including shopping centers and supermarkets, are still at a primitive level.
Of course, Ethiopia is a low-income country and perfection cannot be expected ofeverything. But these negative factors are disappointing many tourists and investors.
Rwanda is equally poor but the streets of Kigali are clean and well organized. In the
mid-19th century, Westerners reported Japanese people to be poor and technologically
backward but also civilized, friendly, and disciplined. Income is not the only variable
that determines national characters.
One of the problems of JICA’s champion product and national branding projects
in Phase 2 was the lack of core authority for promoting these initiatives despite the factthat everyone was excited about the concepts and happy to participate as members. No
Ethiopian organization, public or private, was responsible for planning, coordinating,or trouble-shooting the project. This pointed to the risk that the fever would end when
JICA experts left. At present, we hear that champion products and national branding
may come under EIC. If EIC promotes these with full authority and an appropriate
roadmap, the problem of no focal point may be solved, and we welcome such a move.
JICA’s national re-branding and promotion project 2014-2015 proposed CREATIVITY in MOTION as a national image and produced a video associated with it. It
also suggested creation of HIGHLAND LEATHER brand for Ethiopian high-quality
79CHAPTER 3

leather products using the country’s unique leather materials. Using this brand, some
Ethiopian firms already found buyers in Japan. But such effort must essentially andultimately be carried out by Ethiopian public and private stakeholders, and it is also
they who must decide whether these brands suggested by JICA experts are appropriate
for Ethiopia.
The two initiatives to elevate Ethiopia’s national image—champion products andnational branding—should be continued with Japanese support but with an increasingrole on the Ethiopian side. More initiatives may be started if additional resources areavailable from other donors and investors.
At the same time, we would like to suggest a few actions that do not require hugefunding but may have great impact on the national image. They are related to Bole
International Airport, posting of announcements, and house numbers.
The facilities of Bole International Airport are reasonably modern but its other aspects have room for improvement. This includes the quality of shops in the departurearea where at present spaces are rented out to shops with similar display quality as supermarkets and shopping centers outside. There should be a few antenna shops wherechampion products are showcased with professionalism so tourists can purchase thebest among Ethiopian coffee, honey, wines, leather products, scarves, gemstones,
handicrafts, etc. Additionally, normal airport procedures such as parking, meeting,security checks, check-in, passport control, quarantine, baggage claim, visa issue, etc.
should go through kaizen and benchmarking. We are even more disappointed with thequality of these procedures at local airports. The airport is where most visitors get thefirst impression of Ethiopia and its services should be strategically upgraded.
We are always intrigued at tilted announcements, posters, and banners pasted
with scotch tapes on the walls of government offices and other prominent buildings.
To place them straight at the right location, height, and angle with proper adhesive
seems to us a very easy and costless thing, and it does not require a university degree.
Proper posting of documents and photos should be taught as one of the basic kaizen
lessons at primary schools and to the general public.
Another puzzle is the lack of house numbers on the streets of Addis Ababa, or atleast their invisibility. Business cards only show P.O. Box numbers or crude maps, andour drivers must ask around. This problem may not be unique to Ethiopia but prevalenton the continent. But in Vietnam, houses and shops in all cities and towns are numbered in a predictable way and displayed clearly for easy discovery. At every major
80

Key Policy Components

intersection there is a sign showing street names. What is needed is an instruction onnumbering rules to district police (use of odd and even numbers, which side to start,
how to add more numbers later, coping with narrow lanes, etc.) and an order to display
numbers on every residence and establishment. This should be done in all cities andtowns, not just Addis Ababa.

3-6. Improving business climate
It has been asserted above that Ethiopia’s business climate remains poor by the
global standard and that the Government must seriously work on improving it. It has
also been noted that general business conditions alone are not the main factor that
attracts FDI, but their improvement will surely accelerate the inflow of quality FDI
provided that the labor advantage, Ethiopia’s major attraction for investors, remains
intact. It is essential that Ethiopia set clear goals and implement concrete and consistent actions for this purpose during GTP II and III instead of just talking about
improving business climate. In this section, some suggestions on how such actions
should begin are given.
In all of the issues raised, we propose that action plans for improvement should be
drafted with concrete targets and timetable, responsible person or organization should
be designated, progress along the action plan should be regularly reported to the Government, top leaders should give prompt instructions to solve any problems, and necessary technical and financial cooperation should be mobilized from the international
community. Establishment of a council, committee, or agency solely responsible foroverseeing the entire task of business climate enhancement is a possibility. Raising
Ethiopia’s place in the World Bank’s Doing Business indicators should be part of its
mandate, but the policy goal must be larger than that because global ranking and whattruly attracts investors are two separate things. Becoming sensitive to what quality FDI
needs is important.
For all issues below, we suggest that, even before the action plan is implemented,
the goals and measures of the plan be publicly announced to existing and potential
foreign investors. Such policy announcement will naturally be construed as official
commitment, and we hope that the Government will also take it seriously too (not justlip service). This will enable FDI firms to make a long-term business plan, commit
more resources in Ethiopia, and bear the current inconveniences. It will also be easier
to find willing donors and NPOs to support components of action plans.
81CHAPTER 3

JICA is currently conducting a comparative survey on business environment inselected African countries, and Ethiopia was chosen as its first target country. In Asia
where Japanese manufacturing firms are abundant, such surveys are done annually
by JETRO and the Japan Bank for International Cooperation (JBIC) and we alreadyknow major problems in each country and how they have evolved over time. We hopethat the results of JICA’s African survey will be a useful input to Ethiopia’s policy
formulation.

ERCA
Our first focus is the Ethiopian Revenues and Customs Authority (ERCA), responsible for tax administration and customs inspection, because this agency seems toreceive the largest number of claims and complaints from FDI. This does not howevermean that ERCA officials are lazy or corrupt. On the contrary, we believe ERCA
recognizes its weaknesses and is making best effort to improve the situation. ERCA
Director General explained to us how this was being done including the introductionof the Authorized Economic Operator (AEO) system in 2010 and more recent adoption of the UNCTAD’s Automated System for Customs Data (ASYCUDA), IFC-supported Single Window Service, and One Stop Border Posts with Djibouti, Kenya,
and Sudan. Additionally, DFID has assisted with tax, accounting, and anti-corruption
systems since 2006, the Korea Customs Service helps with modernization of customs
procedure, and JICA provides training for improving customs clearance.
In our opinion, ERCA’s remaining problems mainly come from incompetence
rather than corruption. Unlike many other countries, we do not hear very much about
customs officials asking for bribe in Ethiopia. Delays and unreasonable assessments
do occur, but that is often because Ethiopian officials seriously try to do their job
without having sufficient knowledge about the industry or the product, or under inconsistent instructions and coordination. When products unknown to customs officials
arrive, it usually takes a very long time to check their commercial value through internet or other media, during which the container sits idle for days and weeks. In 2013,
JICA encountered a serious lack of competence and coordination among Ethiopian
ministries and agencies when it shipped champion products to Yokohama for the fifth
Tokyo International Conference on African Development (TICAD V) exhibition. In
Vietnam, Japanese FDI complain that rare metal precision shafts used for high-techdie and mold production are levied the same high tariff as cheap construction steel
82

Key Policy Components

rods which can be produced by local firms and therefore the government wants to protect. Similar confusion can occur in Ethiopia because customs officials do not reallyhave in-depth knowledge of industrial materials and components.
If this view is correct, the main solution lies in well-targeted training of ERCA
officials. Additionally, a scrutiny of operational and reporting systems within ERCA
as well as provision of incentives for ERCA officials to encourage learning and longstay, good practice and its dissemination, prompt problem reporting, and quick andfriendly customer response are needed. There should first be a full review of ERCA’s
problems and subsequent drafting of a doable action plan with clear goals and timetables. Donor support should not be mobilized randomly but for executing programs inthis action plan. The Prime Minister’s Office, or any other appropriate body, should
monitor the progress regularly.
The Ethiopian accounting system follows non-standard rules and practices, whichputs considerable burden on foreign investors. A revision of the accounting system
in line with global standards should be part of the tax administration reform under
ERCA.

Foreign exchange
Another big source of headache is the shortage of foreign exchange, and associated problems of required sales of 90% of foreign currency earnings within 28 days anda long and uncertain wait for obtaining foreign currencies for import. The situation isworse for SMEs and non-exporting companies in comparison with prioritized large
exporting firms. The law says foreign investors have the right to make outward remittances in convertible foreign currency of profits and dividends, principal and interest
payments, etc. but legal rights may not translate to actual receipt of foreign currencies
if banks are unable to allocate them.
Thus Ethiopia still practices the foreign currency surrender system—a legacy ofsocialist past and a temporary crisis management device used only by countries going
through severe stress (Japan adopted this mechanism during an economic crisis immediately after WW2). True, Ethiopia is a low income country with a limited capacity
to earn foreign exchange and underdeveloped financial systems, but this type of control cannot be justified as a permanent mechanism for allocating foreign exchange.
There are many developing countries that face trade deficits and foreign exchange
constraints, but most of them manage to operate far more liberal currency markets.
83CHAPTER 3

Ethiopia should draft a roadmap to transit to a more normal foreign exchange system
in proper steps.
The long-term final solution will be the fostering of competitive agriculture andindustry that can earn ample foreign exchange supported by a highly developed domestic financial sector. But this will take some time so short-term solutions must also
be devised. One such solution proposed by our team is the Cut-Make-Pack (CMP)
mechanism used in Myanmar and other latecomer countries in which a buyer abroad
provides materials to a garment firm operating in a developing country “free ofcharge” and pays only the labor cost for cutting and sewing, thereby eliminating theneed for the garment firm to obtain foreign currency to import materials. We do notinsist on this mechanism only, as it is just one of the temporary and imperfect ways
to minimize delays and inconveniences until a more proper system is in place. Other
short-term solutions must be studied to ease the problem at hand. For both long-termand short-term solutions, professional diagnosis and advice should be sought from anappropriate organization, such as technical assistance of the IMF or other international
institutions versed in underdeveloped financial markets—because foreign exchange
problems are outside the scope of our Industrial Policy Dialogue.

Logistics
Transport infrastructure remains generally underdeveloped in Ethiopia. However, construction is proceeding at full speed to the extent that some are even worried
about too much public investment and future debt sustainability. In terms of volume,
China is the largest donor and builder of new transport systems in Ethiopia. Major
projects include Ring Road and other roads and intersection improvements in Addis
Ababa, Light Rail that started operation in 2015, Addis-Adama Expressway completed in 2014 and other expressway plans, new or improved long-distance roads andrailways, and aggressive expansion of Ethiopian Airlines in fleet, international routes,
and ground facilities. Particularly important is the new railway connecting Addis andDjibouti, to be completed in the near future (we hear the tracks are already laid while
aerial lines and facilities are being worked on). When this railway becomes operational, a large part of logistic problems (i.e., coastal access from Addis) may considerablyease. The Government should start announcing the details of this railway including
type of trains and freighters, freight cost, running time, timetable, associated facilities
such as dry ports and connection to other transport modes, and any other details that84Key Policy Components

allow assessment of competitiveness of the new railway vis-à-vis trucking. This will
be valuable information for potential investors.
The Government is also improving connectivity to cities that will host future industrial zones such as Hawassa, Mekelle, Mojo, Dire Dawa, Adama, etc. New railway
lines, roads, and air strips are planned.
The World Bank published a report on transport and logistics a few years ago. We
do not know if the report can serve as a national transport master plan with a comprehensive list of priority projects and other projects for the entire nation and all modes.
In any case, revisions and updates are needed to reflect the rapidly shifting realityof Ethiopia. Besides hard infrastructure, soft components must also be strengthened
including competition and anti-monopoly policy, trucking services, warehousing, container depots and dry ports, integrated electronic handling of cargo, storage, customs,
and other documents, and so on. Again it is important to paint a future picture, even if
some changes and delays may occur, and publicize it to reassure investors of expected
improvements in transport and logistics.
In this connection, we would like to recommend implementation of business process re-engineering (BPR), benchmarking, and/or kaizen—whichever method(s) the
Government thinks suitable—at Bole International Airport and major domestic airports in Ethiopia. Passport control, customs inspection, security checks, health checks,
check-in counters, baggage pickup, on-arrival visas, bank counters, car access andparking, souvenir shops and restaurants, hotel desks and shuttles, and other soft components that collectively make air travelers either happy or irritated should be reviewed
for serious improvement. Airports are where foreigners get the first impression of thecountry. At present, we do not detect any superiority of Ethiopian airports comparedwith other African airports. The generally low quality of procedures and services at
Ethiopian airports offsets the dynamic business expansion plan of Ethiopian Airlines.

Power
Power shortage is another serious problem for investors at present, with sudden
and frequent blackouts, yet this problem may be largely removed when the Grand Renaissance Dam becomes fully operational at 6,000MW. It will not only greatly expand
Ethiopia’s power source but also allow electricity to be exported to neighboring countries eagerly waiting for project completion such as Sudan, Kenya, Uganda, Rwanda,
and Tanzania. Expected completion is 2017 but uncertainty remains as with any other85

CHAPTER 3

large-scale infrastructure projects. Measured by the construction process, the dam isabout 50% finished and power distribution lines are also being built. The main uncertainty comes from the water sharing issue with Egypt which fears less water supply
during the filling period of the dam. The six-party committee consisting of Ethiopia,
Sudan, Egypt, the United Kingdom (UK), Netherland, and France is deliberating theissue. Even after completion, it is not clear how many years it will take to fill the dam
which depends on weather as well as the outcome of the water sharing negotiation.
Thus the timing of final solution to Ethiopia’s power shortage is unknown. When
it is known, it should be widely publicized which will certainly have a very positive
impact on quality FDI attraction. It is also advisable to proclaim the nation’s long-term
strategy for electricity pricing, power distribution and export, industry organization,competition and liberalization policy, energy mix (including renewable and decentralized energy sources), and other aspects which may affect business strategies of all
firms. For these, a national power master plan may have to be drafted.
In the meantime, short-term measures must be implemented. The Government
promises that industrial zones will be prioritized for power supply so companies operating in any of them will not face any sudden power cuts. Any stoppage, including for
maintenance and repair, should take place with sufficient advance notice and preferably on weekends. We need to see if these promised actions are actually put into practice. Each industrial zone and the Industrial Parks Development Corporation (IPDC)
should keep records of all power-related irregularities for inspection and analysis.

Listening to FDI
We understand that the Ethiopian government already listens to the voices of
FDI and usually solves their problems quickly. Ambassadors and commercial officers of major investing countries such as China, Turkey, and India as well as smaller investing countries often approach top leaders for consideration and correction inbusiness matters. Large FDI firms may have direct access to the Government. Theseare problem-solving of ad hoc and case-by-case type practiced by virtually all governments. Individual firms may become happy but such moguratataki (strike-as-you-go)
approach has no end unless new laws, regulations, and policies are put in place tosystematically change the ground rule. We propose that the hearing mechanism should
be upgraded to an open, regular, and institutionalized dialogue forum with benefits
automatically accruing to all domestic and foreign firms in Ethiopia whether large or86Key Policy Components

small, or new or old, not just the ones that complained.
A formal and regular government-FDI dialogue for improving investment climate is a standard bilateral procedure where many Japanese manufacturing firms operate such as Vietnam, Indonesia, Cambodia, and Myanmar. In these countries, Japanis the leading nation in manufacturing FDI and therefore takes the responsibility for
improving general business conditions. Modality differs somewhat from country tocountry. Participants are usually Japanese businesses and government working together to negotiate with the host government. Several working teams are created corresponding to problem areas, each of which raises issues, sets action plans, and monitors results.7 Discussion may take place annually, irregularly, or in two-year cycles ofproblem-solving (as in Vietnam). Sessions are presided by an appropriate minister orthe head of an FDI agency on the host country side, and an ambassador or a high-level
official from Tokyo on the Japanese side.
In Vietnam, for instance, the Vietnam-Japan Joint Initiative was started in 2003.
The Japanese ambassador led the team of MOFA, the Ministry of Finance (MOF),
METI, JICA, JBIC, JETRO, Keidanren (Japan Business Federation), and the two Japanese Business Associations in Vietnam. On the Vietnamese side, the Minister ofPlanning and Investment invited relevant ministries to solve raised problems. For each
two-year cycle, the first step is to collect problems and complaints from the Japanesebusiness community in Vietnam. The second step is to discuss and agree with theVietnamese government on each problem and its solution (action plan). The third stepis implementation with the Vietnamese government changing laws and policies andJapan supporting necessary actions with technical and financial support. The results
are monitored, graded, and publicly announced. The summary of five phases so far isshown in Table 3-5.
It is evident that many problems ranging from legal matters to macroeconomic stability have been discussed. Some problems such as one-stop service, industrial
master plans, supporting industries, tax and customs procedure, and worker and wage
issues were raised more than once. The successful action rate is relatively high because the process has formal issue-raising and monitoring mechanisms participatedby strongly committed stakeholders on both sides, and also because the Japanese gov7

In Phase 5 of the Vietnam-Japan Joint Initiative, explained below, the following 13 working teams werecreated: law, tax, logistics and customs, labor, IPR, environment, retail and distribution, nonbanks, services, food export, infrastructure, industrialization strategy, and macroeconomy.

87CHAPTER 3

Table 3-5. Vietnam-Japan Joint Initiative for Improving Business Climate
PeriodNo. ofissuesraisedSuccessful
actionSelected highlights

Dec.2003Phase 1
Nov.2005

4485%

Supporting industry M/P, one-stop service, personal
income tax, visa exemption, trading company liberalization, labor & land law, import registration, technology transfer…

Phase 2

Jul.2006Nov.2007

46

94%

Board of Directors rule, one-stop service, shareholding by foreigners, tax hearing, corporate tax procedure, bidding process, transfer pricing, electronics &auto part tariffs…

Phase 3

Nov.2008Dec.2010

31

81%

One-stop service, worker facilities at IZs, food security, retail distribution, macroeconomic stability, loss
accounts in corporate tax, illegal strikes, salary scale
rule, auto M/P…

Phase 4

Jul.2011Nov.2012

70

87%

BOT, IPP/power market, HR & TVET at IZs, minimum
wage, exchange rate stability, supporting industry attraction, IPR, customs procedure…

Phase 5

Jul.2013Dec.201478%

Foreign contractor tax, personal income tax, e-customs, WTO commitments, Japanese language, TVET,
skills certification system, welfare of IZ workers, labor& minimu

104

Source: Extracted from the homepage of the Japanese Embassy in Vietnam.

ernment provides necessary assistance for implementation. Generally speaking, rulechange is easier to adopt than formulation of an effective industrial policy. As a resultof a series of bilateral negotiations, Vietnam’s business conditions have steadily andsignificantly improved not only for Japanese FDI but also for Vietnamese, Korean,
Taiwanese, European, and other enterprises. This positive spillover effect is an additional reason to welcome such bilateral initiatives. As of 2015 Vietnam’s positionin the World Bank Doing Business indicators is 78th, certainly with much room for
improvement. But in the past, the country’s business climate was even more terrible
and very arbitrary. Vietnam has made good progress with Japanese assistance.
In a more advanced investor dialogue, each session not only raises problems but
also solves them immediately. In Ha Nam, a small province of 500,000 people inNorthern Vietnam where about 50 Japanese firms already operate, the Party Secretary(provincial leader) reviews raised problems in advance, and proposes solutions at the
government-Japanese FDI meeting. He also safeguards that his solutions are actually
implemented. All companies attend these meetings, and any director general who is ona business trip sends his deputy to the meeting.
88Key Policy Components

It is difficult for Japan to replicate the same leading role in Ethiopia where Japanis only a small investor. We know that China, Turkey, India, Germany, and others aremeeting to discuss Ethiopian business environment, and the Japanese Embassy is also
invited. We are exploring ways to activate the existing government-FDI dialogue in
Ethiopia, and also how and how much the Ethiopian government should be involved
to substantiate the process.

89

Chapter 4

Assessing GTP II
4-1. Industrial content of GTP II
The Second Growth Transformation Plan (GTP II) 2015/16 – 2019/20 was finalized and approved in December 2015. Drafting of GTP II was coordinated by the
newly formed National Planning Commission (NPC) with extensive stakeholder interaction including Regional States, various social groups and the donor community. For
the donor community, an English summary draft was circulated in September 2015
and a meeting was organized on October 20-21, 2015 where Prime Minister Hailemariam explained key policy areas and responded to foreigners’ questions.
The Japanese team of the Ethiopia-Japan Industrial Policy Dialogue is very interested in the final content of GTP II because it intensively discussed its various aspects
with Ethiopian authorities and proposed certain issues that should be highlighted in
GTP II during the drafting process. Our advice and inputs to GTP II were preparedin response to the request made by Prime Minister Hailemariam in April 2013 in Yokohama. Being a five-year development plan, GTP II covers a wide ground. Here,
our assessment focusses on its industry-related chapters and sections only, especiallyregarding the manufacturing strategy, because GTP II aims to greatly increase the contribution of manufacturing to Ethiopian development and also because this has been
the main topic of our policy dialogue.
Table 4-1 lists selected targets of GTP II concerning industry and structural transformation. To become a lower middle income country by 2025, Ethiopia plans to growat 11.0% per year to reach per capita income of $1,177 by 2019/2020, from the current$691. The double-digit growth target is ambitious but not entirely incredible, given thefact that the country has actually grown at such speed for more than a decade. However, fast growth in the past was not generated by the dynamism of the manufacturing sector as the sector’s contribution to GDP has long stagnated around 5% without
showing any great performance in export or productivity. During the GTP II period,
the manufacturing sector is expected to grow at 21.9% per year and rise to 8.0% of
GDP from the current 4.8% of GDP. With an increasing inflow of manufacturing FDI
and continued active policy, such growth is certainly possible. But growth must come91

CHAPTER 4

Table 4-1. Selected GTP II Indicators Related to Industry
and Structural Transformation
Baseline 2014/15

Target 2019/20

Per capita income

Indicator$691$1,177Growth (real GDP)
Agriculture
Industry(Of which) manufacturing
Service

10.2%
6.4%
23.5%
21.4%
10.2%

11.0%
8.0%
20.0%
21.9%
10.0%

Share of GDP
Agriculture
Industry(Of which) manufacturing(Of which) medium & large manufacturing

38.5%
15.1%
4.8%
3.8%

33.5%
22.3%
8.0%
5.9%

Employment by large and medium manufacturing

380,000

758,000

Export revenue
Manufacturing (% of GDP)
Agriculture (% of GDP)
Manufacturing (% of merchandise export)

0.6%
3.6%
12.5%

3.0%
6.5%
25.6%

8,437 birr
68,158 birr

11,771 birr
91,869 birr

Labor productivity (VA/worker)
Agriculture
Medium & large manufacturing

Note: growth targets are average rates for 2015/16-2019/20. The measurement of labor productivity issomewhat ambiguous. It must be expressed in real terms with a base year and usually in percentage change or index form.

not only from quantity but, more importantly, from quality. Manufacturing growthwith quality must be ensured by the conscious joint effort by the Ethiopian government
and the private sector because, as experiences of other latecomer countries reveal,
quality, productivity and competitiveness of the domestic manufacturing sector do not
automatically arise just because foreign manufacturers arrive in big numbers.
In GTP II, policy targets for industrialization are contained in three different places. It is difficult to concisely summarize what these chapters and sections say because
there are many overlaps and repetitions as well as certain awkwardness in logical flow.
The following are somewhat arbitrary representations of what we think are importantin these chapters and sections based on the official English translation published by
NPC in May 2016 as well as an unofficial English translation prepared by JICA.1
1

92

The Amharic original, the official translation by NPC, and the unofficial translation of the Amharic original by JICA are not exactly the same. This is not just a matter of nuances or proficiency of translation.
We detect different chapter and section titles as well as altered or newly inserted sentences regarding
Major Departures of GTP II and the light manufacturing vision. We have raised this issue to Ethiopian

Assessing GTP IIFirst, in Part II Chapter I (Basis, Departures, Objectives and Strategic Pillars of
GTP II), an overall picture of GTP II, including industry and manufacturing, is presented. In the Basis section, the country’s top vision is set to “become a lower middle-income country by 2025.” In Major Departure section, manufacturing is elevatedto the role of strongly realizing structural transformation. The bold statement, “A new
vision has been set to render the country a leader in light manufacturing in Africa andone of the leaders in overall manufacturing globally” (official English translation) is
particularly noteworthy.2 Quality, productivity and competitiveness are highlighted
with kaizen and benchmarking as two tools. Domestic private sector transformation(or development), by which traders are encouraged to become manufacturers and micro and small enterprises are to become medium and larger enterprises, is promulgated. Export promotion, technology, management of urbanization, and green economy
are also mentioned. The Objectives and Pillars Strategies sections basically repeats
the same main points except a few new areas such as job creation and FDI-local firmlinkage are added. The overall policy direction expressed in this part of GTP II is reasonable and encouraging.
Second, Part II Chapter II (Macroeconomic Sector Plan) discusses some interesting issues related to manufacturing. In Section 2.3 (Structural Change), the idea of
becoming Africa’s light manufacturing hub is frequently mentioned (official English
translation).3 Moreover, the targeted share of manufacturing in GDP (8%) and the targeted share of merchandise export in GDP (11.8%, of which manufacturing occupies
3.0%) are proposed as two concrete targets of structural transformation. Nevertheless,
it is a little strange why these key industrial targets are discussed in this way in the
Chapter on Macroeconomic Plan rather than as the core components of national vision
and/or the manufacturing strategy.
Third, Part IV Section 4.2 (Manufacturing Industry) is structured as Strategic Directions - Objectives - Industrialization Targets - Growth and Structural Change of the
Manufacturing Industry - Implementation Strategies, again with many overlaps and23authorities. As of this writing (July 2016), the question has not yet been clarified to our satisfaction. Our
discussion below is based on the official translation by NPC.
However, the corresponding sentence in the Amharic original we have received reads “A new vision has
been set to bring a leap in light manufacturing in the country,” without mention of becoming a leader
nation. Moreover, becoming “one of the leaders in overall manufacturing globally” is a bolder goal thanwhat we have discussed, namely to become one of the leaders in overall manufacturing in Africa.
In the Amharic original edition (unofficial translation), focus on light manufacturing and the desire to
become a hub of light manufacturing in Africa are mentioned for the first time here (Part II Chapter II).

93

CHAPTER 4

repetitions within the Section as well as from previous chapters.4 The section begins
with the emphasis on the role of manufacturing in achieving economic transformationand industrialization. The following desirable features are listed: productivity, quality and competitiveness; labor-intensive light manufacturing; the role of medium andlarge manufacturing industry in earning foreign exchange and technology transfer; attracting both domestic and foreign investment in quantity and quality; linkage between
firms; industrial parks and clusters; and the reiteration of the vision of “becoming aleading manufacturing hub in Africa and among the leading [manufacturing] countries
in the globe.”
Sections on Objectives and Industrialization Targets are basically reiteration ofprevious discussions.
Section on Growth and Structural Change of the Manufacturing Industry also
repeats numerical manufacturing targets propounded earlier. It also stresses the needto “ensure that real wage rate does not exceed labor productivity” although data are
insufficient to analyze the productivity-wage nexus any further. This section additionally gives targets for seven sub-sectors (textile, leather, metal & engineering, meat &dairy, chemical & construction inputs, agro-processing and pharmaceuticals) concerning output, revenue, foreign exchange earnings, job creation, and so on.
Implementation Strategies present eight programs:
A) Implementation capacity building (i.e., policy enhancement)B) Manufacturing industry investment expansion (for both FDI and domestic
investment)C) Productivity, competitiveness, quality and technologyD) Providing comprehensive support (including industrial parks, policy support, credit and finance, and other incentives; this item covers a wide
ground)E) Prioritized and selected industries5F) The role of state-owned enterprisesG) Micro and small enterprisesH) Climate resilient green industry
Some of these “programs” are fairly long and contain many complex issues whileothers are relatively terse. They collectively present key industrial policy components
45

94

In the Amharic original edition (unofficial translation), section titles and presentation style are different.
This should properly be included in earlier sub-sections rather than in Implementation Strategies.

Assessing GTP II

of Ethiopia in the five years to come. However, we have the impression that they are
not shown in orderly fashion and they contain too many points of seemingly equal
importance. Furthermore, each point is not sufficiently concretized to guide formulation of realistic and implementable “action plans.” It is highly advisable to re-arrange
and re-shape these same points with clear groupings, structure and prioritization, with
duplications eliminated, so Ethiopian industrial policy can be more clearly and simply
understood and communicated.

4-2. Assessment
Based on these chapters and sections of GTP II, let us evaluate the quality of documentation of Ethiopian industrial policy. Compared with the previous Plan for Accelerated and Sustained Development to End Poverty (PASDEP) and GTP I, the spirit
and content of GTP II are quite different. It is not a mere copy of the previous planwith minor updates and revisions. As explained above, the “Manufacturing Industry”
section is rewritten significantly in comparison with the previous “Industry” sectionof GTP I—though within-sector structure is basically similar. Another striking featureis that many things the Japanese policy dialogue team discussed with the Ethiopian
leaders and authorities have been incorporated in the final version of GTP II. The factthat Japanese inputs have been properly noted and actually used encourages us verymuch. Especially we are pleased that:– Manufacturing (overall) has reasonable numerical targets and sufficient discussion.
– Quality, productivity and competitiveness are mentioned throughout GTP II.
– Kaizen as a philosophy, not just tools, is also mentioned frequently. Concretetargets of kaizen are also provided.
– Quality FDI, FDI-local firm linkage and technology learning are highlighted.
– The productivity-wage nexus is touched upon. A few productivity targets(though still primitive) are given.
– High-tech and future industries are targeted but with moderation (as we suggested).
– National image building will be undertaken.
These are notable new features of GTP II. The guidance of national leaders aswell as the works done by the advisors, ministries and especially NPC which broughtthese changes are highly appreciated. However, this does not necessarily mean that all95

CHAPTER 4changes are for good or that all numerical targets are appropriate. There are still gapsthat need to be considered for improvement. Regarding industry in general and the
manufacturing sector in particular, four issues can be raised.
First, the Japanese team is still confused and not entirely happy with the way theLight Manufacturing Vision is presented. In October 2015, NPC confirmed that thisvision would be highlighted as one of the major departures from GTP I in the chapter
where GTP I review ended and GTP II began (Part II Chapter I). While the goal of
becoming a leading nation in light manufacturing in Africa is clearly declared in the
expected place (“Major Departures”) in the official English translation, the same vision is not found in the Amharic original (and its direct English translation). The lightmanufacturing vision is mentioned in two other places in GTP II, the Macroeconomic
Chapter and the Manufacturing Industry Section, but as one of the many points to beheeded.
Second, while the terms quality, productivity and competitiveness are cited manytimes, there is no chapter dedicated to the analysis and concrete goal setting on thisissue. We were previously informed that there would be a new chapter on Quality,
Productivity and Competitiveness. In plan documents such as this, the important thing
is not how many times the word is mentioned but how clearly the essence of the problem is analyzed and policy direction is set. Analysis of quality, productivity and competitiveness must be deepened, and concrete targets and action plans must be crafted.
Third, the policy template may have to be improved as the current formats arehighly confusing. We have already pointed out the problem of overlaps, too many
points and unnatural logical flow. GTP II basically follows the within-chapter andwithin-section structures of GTP I. For example, most sectoral sections are structured
as Strategic Directions - Objectives - Targets - Implementation Strategies (with necessary revisions and additions for particular sectors). However, this may not be themost appropriate format for expressing policy as it tends to invite repetitions as well as
ambiguities as to what item should go into where. Policy should be presented in a moreconcise and logical way even to the extent that its essence can be summed up in a compact one-page diagram—as it is often done in policy formulation of Japan, Taiwan,
Malaysia and Thailand. How to write industrial policy documents effectively was oneof the topics taken up by Phase 1 of our Industrial Policy Dialogue. We may choose tocontinue this discussion in the following phase of Industrial Policy Dialogue.
Fourth, there should be stronger and broader actions for improving the investment
96

Assessing GTP II

climate. GTP II mentions this problem only lightly. Compared with most other developing economies in Asia and Africa, Ethiopia’s business conditions have much roomfor upgrading. Arbitrary and cumbersome procedures on implementation grounds area major barrier for attracting quality FDI to Ethiopia despite the fact that top leaders
and advisors are highly motivated and well informed. To begin with, the foreign currency problem and ERCA’s efficiency need to be targeted with concrete action plans.
We know that policy actions have already been initiated. GTP II should have highlighted them more loudly.

4-3. Japanese alignment with GTP II
The Japanese policy dialogue team will continue to combine policy discussion
with Japan’s concrete industrial projects. In Phase 3 of Ethiopia-Japan Industrial Policy Dialogue, a broad direction of bilateral industrial cooperation for the next five years
should be set in advance, instead of setting agenda each time without knowing where
we are going eventually. This does not mean that all cooperation must be agreed inadvance; sensible adjustments should be made as policy interest, circumstances andbudget availability change. Both sides should promise to do their best to pursue agreed
goals while leaving the details of individual projects open and flexible. By doing this,
we are exploring a new form of bilateral development cooperation which is more binding than the scattered, anything-goes approach but more flexible and trust-building
than pre-set and rigid conditionalities.
Japan would like to closely align its industrial cooperation with GTP II. Despite
the presentational weaknesses of GTP II mentioned above, this is possible because
the main thrusts of industrial policy are agreeable. Among all industrial targets andpolicies mentioned in GTP II, we would like to select the areas in which Japan has acomparative advantage and can make most effective contribution. This will be doneon the foundation of our past industrial cooperation such as kaizen, champion products
and discussion of FDI and linkage policy, which will be continued, but new cooperation will also be added.
From Part IV Section 4.2 (Manufacturing Industry) of GTP II, we would liketo extract elements from sections on Strategic Directions and Objectives for Japanese alignment. They are re-classified into four groups: (i) strengthening Ethiopian
enterprises; (ii) attracting quality FDI; (iii) FDI-local firm linkage; and (iv) productivity-wage nexus. As for the remaining sections of Section 4.2 of GTP II, Japan will se97

CHAPTER 4

lect targeted sub-sectors and implementation measures in such a way so the above four
goals are supported most effectively. In other words, we propose to align Japaneseindustrial cooperation with the policy directions and objectives (upper structure) rather than sub-sectors or implementation programs (lower structure) to avoid confusion,
because there are many redundancies among these different levels as noted earlier.
To show what Japan will do more concretely, the two-page table at the end of thischapter presents our proposal for Japanese contribution to these four groups of industrial goals of GTP II. The table has already been agreed in principle by the high-level
Ethiopian authorities, and the next step is to work out details of each project between
the two governments. Several points are in order.
First, we would like to clearly state Vision and Targets for our cooperation asshown at the top of the table. Our proposed vision for bilateral industrial cooperation
is for Japan to “help Ethiopia become a high-quality manufacturing nation which hasseriously and selectively learned the developmental experiences of Asia including Japan.” For Targets, we would like to set numerical indicators by which progress will
be monitored. They cover industrial human resource, strengthening Ethiopian manufacturers, champion companies, champion products, and attraction of Japanese FDI.
These will give us the sense of where we are going in the medium to long run.
Second, Policy areas and cooperation components in the table are the areas inwhich Ethiopia and Japan may be able to perform joint interventions. These components are the ones that at least one of the Japanese cooperation organizations are interested in providing, and the Ethiopian government also agrees with these components
in principle as noted above.
Third, Japan must consider what role it should play to improve Ethiopian investment climate when it is still a small investing country. Japan’s engagement should beselective and targeted, and generate synergy and avoid duplication with other donors.
Fourth, the Japanese government and private sector will continue to work on
promoting Japanese investment in Ethiopia, including the proposed Japanese investment area in Kilinto. Private developers and manufacturing firms will be the investors,
while Japanese public organizations such as METI, MOFA, the Japanese Embassy,
JICA, GRIPS, JETRO, JBIC as well as UNIDO Tokyo will support all types of Japanese investors interested in Ethiopia. Such support has been extended in the past, andit will also continue in the future.
Fifth, we will continue to use Industrial Policy Dialogue Phase 3 as the main vehi98

Assessing GTP II

cle to discuss policies with Ethiopia. Apart from the proposed industrial projects listed
in the table, we will conduct policy studies which contribute directly to the executionof GTP II. Instead of Japanese experts offering information and analysis unilaterally to
the Ethiopian audience, we plan to actively involve Ethiopian policy research institutions such as the Ethiopian Development Research Institute (EDRI), the Policy Studyand Research Center (PSRC), universities and its centers, economics associations, andso on, in doing policy research and making proposals. Details of such joint research
will be worked out in coming months. This can be interpreted as “import substitution”
and “technology transfer” in pragmatic policy research with the aim that Ethiopian
researchers will be able to do high-quality policy research for GTP II and GTP III evenwhen foreign advisors leave.

99

100
Discuss content & modality with Japanese side in
the near future.
Clarify & give sufficient mandate to organization,
department & staff responsible for export
promotion; inter-ministerial coordination.

Discuss concrete and realistic modality first.
Champion products & national branding.
Continued promotion of Ethiopian Highland
Leather including managerial and technicalsupport. Support for quarantine inspection.
Strengthen human resource needed for 3-1 to 3-4
above. ABE Initiative.
The first study already done by JICA. GTP II often
mentions productivity & wage but needs more
analysis.

3-6. Research on productivity andwage

3-5. Industrial human resource

WB (CJC Project) (-2020)

DFID (PEPE) (-2020)
EU (TTF) (-2017)
WB & others (WEDP)(-2017)
GIZ (STEP) (2016-)

NEPAD (PR to Africa),
ACET (research)

NEPAD (PR to other
African members)

Possible support by othercountries/donors

Mobilize and/or adjust existing institutions &policies in cooperation with Japan.
Implementation by an appropriate research body(with Japan supporting and strengthening from the EDRI/use of French fund?
sideline); use of other donors' support if available.

Provision of short list and related information forcompany selection; cooperation in implementation

3-2. Creation of champion
companies

3. Domestic
3-3. FDI-local firm linkage andPrivatetechnology transfer
SectorTransformation
3-4. Export promotion

Mainly for LMEs; candidates can be small in
number. First agree on method, then screen &select candidate firms from a short list.

3-1. Management improvement

Solution of remaining technical issues.

Active involvement in dissemination; active use of
AU, NEPAD & other frameworks.

Strengthen & expand human resource ofEKI; incentivize kaizen staff/experts & otherstakeholders for long-term commitment.
Continue movement & Kaizen Month during GTP II;
active use of National Kaizen Council.

Continued active participation & policy
implementation effort.

Actions required by the Ethiopian Remark
Government

Designate Ethiopian counterpart; long-term
Mainly for SMEs; JICA's TA support related to ODA
commitment; discuss content & modality withloan is under consideration.
Japanese side in the near future.

2-4. Infrastructure (kaizen center)2-3. Dissemination to othercountries

The movement must go on until productivity
becomes part of irreversible Ethiopian culture.
A request for cooperation for this purpose wasreceived from NEPAD in April 2016. Also link with
TICAD VI.
In progress. Technical issues need to be resolved.

2-2. Kaizen National Movement

2. Kaizen

JICA' TA support in progress (Phase 3). Monitor
activities under the new ministry.

2-1. Promotion & upgrading ofkaizen in Ethiopia

RemarkContinue to discuss policy (Phase 3); align withindustrial objectives of GTP II. Monitor all othercooperation projects below.

Cooperation component

1. Policy
learning
1-1. Industrial Policy Dialogue(bilateralpolicydiscussion)

Policy arean VISION--Japan’s industrial cooperation vision is to “help Ethiopia become a high-quality manufacturing nation which has seriously and selectively learned
the developmental experiences of Asia including Japan.”n TARGETS--targets for Japan's industrial cooperation are “strengthening industrial human resource,” “transforming Ethiopian firms into competitive manufacturers,” “creation of champion companies,” "creation of champion products," and “attraction of sufficient Japanese FDI.” (We would like to set numericaltargets for each, if these targets are agreeable to the Ethiopian government.)(Possible Policy Areas and Cooperation Components)

Japan's Industrial Cooperation during the GTP II Period

CHAPTER 4

Possible support by othercountries/donors
IFC&others (Investment
Climate Program) (-2017)

Maintain special treatment for Japanese area
creation (including allocating Kilinto land) until end
2018 at the earliest and possibly beyond. Provide
support for operation.
Creation of Japan Desk (possibly at EIC) with staff
having clear mandate & cooperating actively with
JETRO & other relevant Japanese agencies.

Under study by PPSEZ (private developer).
Japanese government will facilitate private
developers' initiatives.
Information, seminars, business missions, trade
fairs & partner matching. Possible support for joint
investment with Turkish, Indian and other foreign
partners.
Support from JICA & JBIC available for eligible
Japanese firms under certain conditions.

5-4. Attraction of Japanese FDI

5-5. Providing investment & loan
facility for Japanese FDI and /or industrial zone developers

Active use of Japanese experts. Work closely with
JETRO. Serious consideration of Japanese advice
for realizing Japanese standard in soft and hardinvestment support conditions.

Discuss & agree on content that conforms tointernational standard, not just Ethiopia's current
practice.

Work closely with Dohwa(Korea, supervising Kilinto
construction)

WB (CJC Project) (-2020)

Active implementation of discussed and proposed Netherlands (-2016)
measures; use of other donors' support if available.
UNDP (National Logistic
Strategy) (-2015?)
WB (Geothermal Sector
Development Project)(-2020)

Actions required by the Ethiopian Remark
Government

5-3. Establishment & operation ofindustrial area for Japanese
FDI

Negotiate via official channel; in addition
4-6. Bilateral investment agreement to investment agreement, the possibility of& bilateral tax agreement
tax agreement is being studied by relatedorganizations.
Preparation & implementation of investment
promotion strategy. Improvement of one stop
5-1. Investment promotion &service & investor services. JICA is preparing TA
investor support in generalfor EIC & IPDC. JETRO will promote Japanese
FDI in cooperation with EIC.
Establish infrastructure quality standard;
5-2. Improving quality of industrial strengthen investor service, operation &zones
management at IZs. Japanese expert dispatched
to IPDC.

4-5. Power4-4. Logistics

Support creation and management of a roadmap incooperation with EIC.

4-1. Improving investment climate(general framework)
4-2. Shortage and allocation offoreign currency
4-3. Tax and customs clearance(ERCA)
These are critical issues for all investors including
Japanese. However, Japan needs to consider
what role it should play as a relatively small
investing country in Ethiopia. JICA is conducting
a comparative study of investment climate inselected African countries including Ethiopia.

RemarkCooperation component

ments & budget availability and may not be available for all policy areas and cooperation components listed above.

Note: drafted by the GRIPS Development Forum based on information available on June 4, 2016. Japanese support is subject to government policy, cooperation instru-

5. Strategic
FDI
attraction

4. Improving
investment
climatePolicy area

Assessing GTP II

101