Industrial Policy Directionof Ethiopia：： Suggestions for
PASDEP II and the Next Five Years

GRIPS Development Forum
November 24, 2009

BackgroundOver the recent years, the policy content ofEthiopia’s trade & industry (T&I) have beensignificantly enhanced.
SDPRP (02/03-04/05)
No independent T&I chapter.

PASDEP (05/06-09/10)
T&I chapter, with targets
for selected sub-sectors
based on the IDS (2002).

Further upgrading of T&I policy is needed in
the PASDEP II period, as GoE plans toexpand the policy scope and measures ofindustrial support.

BackgroundEthiopia has vigorously learned the basics ofindustrial policy formulation in a relatively shortperiod and built institutional foundations totackle the next round of challenges:
Policy documentation
 Selective export promotion; export steering committee;
industrial policy toolkit;
 Higher-level TVET; Development centers and institutes (MOTI); publicprivate dialogue; public administration reform;
 Infrastructure; Strategic mobilization of ODA, FDI, and academics, etc.
Our PurposesProvide ideas and issues that may be usefulin drafting T&I chapter of PASDEP II(2010/11-2014/15).
Vision and orientation
 Expected content
 Issues to be stressed

PASDEP II T&I chapter should be followed by
the 5-year implementation plan of MOTI.

PASDEP I

PASDEP IIPrinciples of IDS
 Priority industries &targets (focusing on

production & exportearnings)


Cross-cutting issues(PSD, privatization, SME,export, etc.)

Review of industrial
performance

Medium-term vision& orientation
 Priority industries &targets
 Priority issues &targets1. Review of Recent PerformanceIndustrial growth and exports:
First three years of PASDEP I: very positive Last two years of PASDEP I: negative effects of an
overheated economy and global financial crisisEthiopia’s recent macroeconomic difficulty byitself does not give a compelling reason tochange its industrial policy.
 The performance of productive sectors (e.g.,industry, agriculture) is determined by a
combination of private effort, policy effort,
and external circumstances.
Review of Recent PerformanceIndustrial policy should be designed andevaluated for its contribution to long-term
industrial achievements (αxｔ＋βzｔ ),rather than short-term cyclical events(eｔ ).
tyｔ=αxｔ＋βzt＋eｔ
y: industrial performancex: private effort; z: industrial policy;
e: unpredictable shocks

Review of Recent Performance

Nevertheless, there is little evidence that
Ethiopian industries have made strong
progress in quality improvement,international competitiveness or structuraltransformation in the last several years,
despite all-out policy support to the selectedexport industries.

Assessment of both costs and benefits ofpolicy support should be conducted.

Recent Economic Performance(Ethiopian year) 1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
(Western year) 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Real GDP growth (%)
5.2
6.1
8.3
1.5
-2.2
13.6
11.8
10.8
11.1
11.3
Nominal GDP (millions of Birrr)
58,789 66,648 68,027 66,557 73,432 86,661 106,473 131,641 171,834 245,585
Nominal GDP (millions of USD)
7,828
8,188
9,167
7,794
8,559 10,042 12,306 15,164 19,539 27,939
GDP per capita (USD)
129
131
127
118
126
143
171
205
257357
Sector share (% of GDP) 1/Agrilculture
51.2
49.8
50.9
49.1
44.9
47.047.4
47.1
46.3
44.6
Industry
12.4
12.4
12.1
12.9
14.0
14.0
13.6
13.4
13.3
13.1
Service
37.2
38.7
38.0
38.6
41.7
39.7
39.7
40.4
41.4
43.4
External relations (% of GDP)
Export
11.6
12.0
12.0
12.6
13.3
14.9
15.1
13.8
12.7
11.8
Import
24.0
23.9
23.7
26.6
27.4
31.6
35.5
36.5
32.1
26.9
Trade deficit (export - import)
-12.4
-11.9
-11.7
-14.0
-14.1
-16.7
-20.4
-22.7
-19.4
-15.1
Total trade (export + import)
35.6
35.9
35.7
39.2
40.7
46.5
50.650.3
44.8
38.7
FDI (approval, millions of Birr)
1,080
1,627
2,923
1,474
3,369
7,205 15,405 19,980 46,949 92,249(approval, % of GDP)
1.8
2.4
4.3
2.2
4.6
8.3
14.5
15.2
27.3
37.6
Population (million)
60.8
62.9
64.4
66.3
68.2
70.1
72.1
74.1
76.1
78.2
Population in rural area (%)
85.5
85.3
85.1
84.9
84.7
84.4
84.2
84.0
83.8
82.9
Population in poverty (%)
41.9
38.7
Exchange rate (Birr/USD, period average)
7.51
8.14
8.33
8.54
8.58
8.63
8.65
8.68
8.79
8.79
Sources: Ministry of Finance and Economic Development, National Bank of Ethiopia, and Ethiopian Investment Agency.
1/ Do not add up to 100% due to estimate errors of intermediary margins of financial institutions (service sector).

Results Achieved:
Export value of priority sectors
Unit: USD million
2000
Avr.
2007/08 Growth(Ethiopian Year)(Western Year)

1996
2003/04

1997
2004/051998
2005/06

1999
2006/07

Leather & LeatherProducts

4367

75

89

101

27%

Textile & Apparrel

9711131517%

Agro Processing

203436

43

5229%

Total

72108122145

168

24%

Country’s total

597

819

1,008

1,185

1,481

26%

Share of the threesectors

12%

13%

12%

12%

11%

Source: Ministry of Trade and Industry (presented at the EDRI-JICA workshop on Dec.15, 2008.)
Note: Export earning targets under respective Five-Year Action Plans include:
・Leather & Leather Products: Generate USD 500million by 2009/10.
・Textile & Garment: Generate USD 500 million by 2009/10.

Results Achieved:
Export value of LLPT sector
Unit: USD million(Ethiopian Year)(Western Year)

1996
2003/04

1997
2004/051998
2005/06

1999
2006/072000
2007/08

Semi process skin4356584967

Semi-process hide477812Finished leather-382712Footwear

0.80.825.610Total

43677589101

Source: Ministry of Trade and Industry (presented at the EDRI-JICA workshop on Dec.15, 2008.)
Note: The Five-year Action Plan for leather & leather products aims to: (i) shift to producing crustand finished leather products; and (ii) generate export earnings of USD 500 million by 2009/10.

2. Essence of Policy Orientation
Proactive Industrial PolicyThe policy orientation of Ethiopia’s IDS(2002) deserves special attention anddissemination.
Improving business climate generally and for all Responding quickly to the needs of the private
sector Creating dynamic comparative advantages -- withprivate sector-driven, but with strong stateguidance

Clearly stipulate that Ethiopia is pursuing aproactive industrial policy. (This is not new; reaffirmation of IDS principles.)Proactive Industrial PolicyThis policy orientation differs from:Socialist planning and state production
 Laissez-faire and rapid integration undersmall government (basic approach or“Washington Consensus”)
 Developmental states with infant industry
promotion (E. Asia in the past) FDI-led industrialization (E. Asia now)Comparison of Two Approaches
Basic Approach(or Washington Consensus)

Proactive Approach

Market-driven development
under globalization

Yes

Yes

Retaining sufficient policy tools
for latecomer industrialization?

Yes

Dynamic capacity development?

Yes

Internalizing skills andtechnology

Yes

Yes

Effective public private
partnership

Yes

Yes

Deep knowledge of the industry?

Yes

A strong state?

YesFuture Direction
Expansion of Policy Scope and Measures
Ethiopia’s future industrial policy should takeaccount of its improving policy capability over
the recent years, as well as changing
circumstances.
 Ethiopia should broaden the policy scope andmeasures for industrial promotion, building on
the past policy and institutional efforts.
PASDEP II T&I chapter should clearly explain
the planned policy shifts, with their reasons.

Expansion of Policy Scope and MeasuresThe list of priority sectors should be broadened
from a few export-oriented industries toinclude import substitution industries whichhave high domestic demand (=high impact on
reducing BoP pressure) and whose
technologies are relatively easy to learn.

More detailed list of newly promoted industries
must be constructed with careful studies andclear selection criteria.

Expansion of Policy Scope and Measures
The scope of promotion measures should be alsobroadened, with greater emphasis on internalizing skills
and technology and managing market instabilities (notonly incentives and export monitoring).
 Time limits and the graduation rule of promotion
measures should be introduced in advance, to avoid
policy misjudgment and political capture.
Promotion measures should be available to all eligibleenterprises until the time limit of promotion expires(regardless of pioneers or latecomer copycats).
Cf. This approach differs from Prof. Rodrik’s “pioneers only” rule(2008).

Proactive Industrial Policy andExpansion of Policy Scope
Basic Approach

Proactive Approach(or Washington Consensus)

Export Promotion(1) Liberalize, privatize,
open up, level playing
field(2) Policy skill and in-depth
industrial knowledge
required

Import Substitution(1) (Same as above)(3) Very high policy skill
and in-depth knowledge
required

When the policy scope is expanded from (1) to (3), the following
measures become more relevant:Time limit and graduation ruleCompetitiveness and value creation

Clear selection criteria for priority sectors

Master Plans and Action Plans with an effective
implementation mechanism

Medium-Term Industrial
VisionWhat Ethiopia plans to attain in the next fiveyears, guided by the long-term vision andprinciples of ADLI & IDS?
Internalization and scaling up of skills,
technology, and other capabilities that
support the competitiveness and value
creation of the manufacturing sector(for both export-oriented industries and importsubstituting industries).

3. Expanding the Scope ofPriority Industries
Clarify new (and continuing) priority sectors
for the next five years.
 For each priority sector, targets and policy
orientation for the PASDEP II period shouldbe spelled out.
 Master Plans and Action Plans must be
drafted subsequently to give more details;
and implementation should be followed up
with an effective mechanism.
Priority Industries (1)Export-Oriented IndustriesThe following export-oriented industries
can continue to be supported in thenext five years:
Leather and leather products
 Agro-processing Textile and garment
 FloricultureExport-Oriented Industries
However, there should be studies to review
the performance of these industries inresponse to policy support and evaluate thestatic and dynamic costs and benefits ofpolicy support.
 For agro-processing, the concrete mix oftargeted crops or products should be reexamined (incl. performance review of thesugar industry).
Priority Industries (2)Import Substitution IndustriesThe following import substitution industries
may be added to the priority sector list.
Steel Metal processing Cement Glass Consumer soap and detergent (“chemicals”)
 Popular medicine (“pharmaceuticals”)
 OtherImport Substitution IndustriesFor each candidate industry, a preliminary
feasibility study should be conducted.
Industry deserving policy support
A full-fledged MP with detailed Action Plans
should be drafted.

Drafting MP for import substitution industry
should proceed in realistic steps; start with
one or two industries, and then cover allindustries by the end of the PASDEP II period.

4. Expanding the Scope ofPriority Issues


1.
2.
3.
4.

Current PASDEP discusses: privatization, SMEs,
trade-related issues, export development, andPSD.
In the future, greater attention should be paid tothe enhancement of competitiveness, industrial
human resource, logistic efficiency, and industrial
linkage and structure, etc.
Quality-based competition
Matching industrial human resource with demand
Agriculture-industry linkage
Geographical aspects of industrialization

Priority Issues (1)Quality-based Competition
Ethiopia has made progress in implementing“benchmarking,” as a method to enhancequantity-based competition.
 In the future, Ethiopia should pursue not onlyquantity-based, but also quality-basedcompetition, depending on product type andtargeted markets.
 Policy tools for quality-based competition,such as kaizen, branding, strategic marketing,design training, and so on, should be added
and strengthened.
Priority Issues (2)Matching Industrial Human Resource with
DemandEthiopia’s effort to build newtechnology and engineering universities
is highly commendable.
 At the same time, demand for thishuman capital must be prepared as its
supply is being greatly increased.
Priority Issues (3)Agriculture-Industry Linkage
Key to the success of ADLI.
 Serious policy effort should be made in agroprocessing industries to enlarge the existing
links and to create new ones.
 The quality and content of the agroprocessing industry MP and Action Plan andeffective cooperation btw. MOTI and MOARD
become crucial.
Priority Issues (4)Geographical Aspects of Industrialization


Policy interest must be expanded beyond theconstruction of transport infrastructure to include
other spatial aspects of industrialization.
Logistic performance of the Addis Ababa-Akaki area
 Policy criteria for creating and operating industrialestates Initiation of the construction of Growth Poles andGrowth Corridors, as overall regional development
which encompasses agriculture, agro-processing,water management, tourism and related
manufacturing and services.
5. Two Additional Issues (1)Numerical Targets
Ethiopia should broaden the scope ofindustrial targets, by introducing moreindicators for skills, technology and otherinternal capability in addition to the traditional“macro” targets.
 It is also important to:Treat targets as indicative and interpret themcarefully.
 Translate qualitative goals into proxy variables.
 Set goals and timetables properly (both ambitiousand realistic).
Current PASDEP: Numerical Targets Related to Industry
Baseline (endTarget2004/05)(2009/10)

Growth rate of industry value added (%)
Share of industry in GDP (%)
Revenue generated from industrial export(leather and leather products) (USD million)

8.1

11.5(average)

13.6

16.5

63.73

500

Source: PASDEP Annual Progress Report 2007/08 (MOFED draft, p.121)

Current PASDEP: Major Achievements in Trade and Industry by 2007/08
1. Textile and garment

Encouraging steps have been observed; 71 projects were at different stages ofoperation. Export earnings recorded USD 14.5 million (15.1% higher thanprevious year).

2. Tanning industry

Support has been provided in manpower, machinery, market access and otherareas. 5 of 16 tanneries supported registered better performance, and 3
tanneries have shifted their export to crust and finished leather products.

3. Leather export

The tanning industry generated revenue of USD 101 million, 13% higher
than previous year but lower than target (USD 153.4 million). Shoe export
recorded USD 9.66 million.

4. Sugar

Production was 296,009 tons (3 sugar factories), slightly above target.

5. Cement

Mugher produced 737,043 tons (against the target of 871,000 tons); Messebo
produced 950,000 tons (18% higher than the previous year); five new plants
produced 146,833 tons. Due to construction boom, supply gaps emerged and613,767 tons of cement was imported in 2007/08.

6. Floriculture

Flower farms reached 922 ha (43% increase over previous year); flower
export reached USD 111.7 million (against the target of USD 166.7 million).

7. Privatization

15 public enterprises (PEs) given decision to privatize; 3 PEs for re-tender;
31 PEs carried out business evaluation; 10 PEs completed transfer withdifferent modalities, etc.

8. Export earning

Export in 2007/08 was USD 1,481.4 million (25% higher than previousyear), with coffee earning 35.5% of total. Target for 2007/08 was USD
1,727.5 million. Export performance has been evaluated monthly first by
MOTI and subsequently by the National Export Steering Committee.

9. WTO accession

Process has continued.

Source: Extracted from PASDEP Annual Progress Report 2008/09 (MOFED draft, p.16)
This is a summary of more detailed discussion of achievements and challenges in the main text of the Report (pp.83-88)

Two Additional Issues (2)Policy Documents and Organization
All existing industrial MPs should be revisedwith new content and structure, and new MPs
will be drafted for the new priority sectors
over the medium-term (step by step).
 MOTI’s policy organization must be upgradedto strengthen “horizontal” mechanisms
among its departments and vis-à-vis otherministries to combine and coordinate different
functions.
In Summary:In the next five years, Ethiopia may wish to broaden
its operational policy scope from “export targets
setting” to “skill-intensive industrialization” thathighlights competitiveness and internal value creation.

Domestic capabilities of both the private sector and thepolicy making mechanism should be strengthened.
Appropriate targets (quantitative & qualitative) should beagreed. Necessary programs and institutions must belaunched or enhanced.
Master Plans and action plans must be drafted; andimplementation should be followed up with an effective
mechanism.

Possible Ingredients of Trade & Industry Ch.
Review of industrial performance
Medium-term vision and orientation- Proactive industrial policy- Expansion of policy scope and measures- Internalizing skills and technology
Priority industries (possibly with targets)- Export-oriented industries- Import substitution industries
Priority issues (possibly with targets)- Quality-based competitiveness- Matching industrial human resources with demand- Agriculture-industry linkage- Geographical aspects of industrialization, and others