Cross-cutting Issues inIndustrialization
In the Context of Broadening the Policy Scope in Ethiopia

Kenichi Ohno (GRIPS)
Addis Ababa, Sept. 2009

Background In the last several years, Ethiopia haslearned and implemented various industrial
policy tools and improved its policy capability.
 Ethiopia has had some success in promoting
a few export-oriented industries.
 Ethiopia is expanding its policy scope toinclude import substitution. This will entail
new challenges and risks, and policy
capability must be further strengthened.

Our Purposes Raise issues and stimulate policy debate as

Ethiopia expands its policy space.
 Ideas for drafting the industrial chapter ofnext PASDEP.
 Finding concrete issues to be studied in thesubsequent bilateral policy dialogue.
(Urban industries only; rural industrialization isbeyond the scope of this paper)

Topics
1. Policy framework and structure
2. Past review and future evaluation
3. Time dimension of industrial promotion
4. Import substitution
5. Industrial clusters and corridors
6. SME promotion(Each issue contains 2 or 3 sub-issues)1. Policy Framework andStructure
1-a. Ethiopia has an industrial vision but strategy,action plan, and review remain incomplete.

LinkSample Format of Thai Automotive Master Plan
StrategyAction Plan

1.2 Automotive
Human
ResourceDevelopment

3. Automotive training
center project
3.1 Provide
Systematic training
to the industry fromworkers tomanagement level
3.2 Skill training

3.3 Provide training
to engineers in thefield of advanced
engineering andspecialized
technology

Key success
Main
Cooperati
indicator
resp. org. ve org.
Standardized 1. Number ofOIB/TAIA/
TAI
automotive
TAPMA/F
trained persons
training center 2. Number ofTI
companies
sending
employees fortraining
3. Increased
income oftrained persons
4. Costreduction andprofitability
OutputSource: Executive Summary (English), Master Plan for Thai Automotive Industry
2002-2006, page 10.

1. Policy Framework andStructure
1-b. The industrial chapter of the next PASDEP,
and the five-year industrial implementation
plan to be prepared by MOTI, should stateclearly the direction of industrialization
strategy in the next five years.
For example:- Review of export-orientation strategy- Directions and targets for the next five years- Import substitution- New industrial strategies and tools

1. Policy Framework andStructure
1-c. All three levels of industrial policy should
be strengthened.
Basic – Stable, transparent, and businessfriendly environment
Intermediate – Responsiveness to businessneeds and problems
Advanced – Pro-active creation of dynamic
comparative advantage under state guidanceand effective PPP

2. Past Review and Future
Evaluation
2-a. There should be an ex post review of exportindustry promotion.
Medium-sized reports should be prepared
quickly for leather, garment, floriculture, (foodprocessing?):- Quantification of direct and indirect costs- Benefits and performance of industry- Was intensive support effective? Worth thecost? Lessons and directions for future?

2. Past Review and Future
Evaluation
2-b. There should be ex ante analyses of
proposed import substitution industrialization.
- Preliminary studies of key import substitution
industries within a few months (to be followedby full M/Ps or F/S).
- These studies (past & future) should be
preferably conducted by private Ethiopian
experts to build government-academic link.
- Cooperate with International Growth Center(UK) for data, analyses.

3. Time Dimension ofIndustrial Promotion
3-a. Industrial promotion must always be
temporary with pre-announced graduation
schedule.
- Proper balance between globalization anddomestic industry promotion is required.
- Assistance must be reduced over time,
regardless of success or failure.
- Leather, floriculture: continued promotion butwith graduation schedule.

3. Time Dimension ofIndustrial Promotion
3-b. Time-bound support measures should beavailable to all producers, whether pioneers orcopycats.
Dani Rodrik: “Promote new activities only, notexport. Assist pioneers, not emulators.”- Impractical and unfair – impossible to identify
pioneers (not necessarily first movers).
- Distorted incentive for “license hunting.”

3. Time Dimension ofIndustrial Promotion
3-c. A long-term liberalization roadmap should
be prepared in anticipation of WTO accession.
- There should be a long-term roadmap to linkindustrialization and integration strategies.
- Without industrialization plan, WTO entry
negotiation will be driven by paper works andpolitical/diplomatic battles.
- Study “order of economic liberalization” forproper sequencing to avoid crisis.

4. Import Substitution
4-a. Import substitution must avoid the risks ofpolicy misjudgment and political capture.
- IS is more risky than EP because gov’t has
power to regulate domestic markets (prices,subsidies, entry, standards, etc.)- Anne Krueger says IS is nonoperational
because (i) gov’t cannot distinguish infants
from dying industries; (ii) politics will always
highjack good intention.

4. Import Substitution
4-b. Technical details are key to the success of
IS. A high-quality F/S or M/P should beprepared for each IS industry to be promoted.
- Markets and gov’t are both imperfect, but it is
gov’t that must be the agent for change indevelopment (=developmentalism).
- Krueger’s conclusion is unwarranted: improvepolicy capability to avoid these well-known
risks in advance, not abandon IS entirely.

The Case of Steel Industry
 A complex industry with different products,processes, market segments.
 Identification of material flows and problems.
 Key to profitability - location, technology,
capacity, equipment, input procurement, I/O
linkage, factory management, training, timingof investment, taxes and tariffs, finance, roleof distribution intermediaries, etc.
 Start from long to flat steel; from downstream
to upstream; from low to medium quality.

Material Flows of Steel Industry in Vietnam, 2005

Source: Nozomu Kawabata, “Iron and Steel Industry in Viet Nam: A New Phase and Policy Shift,” Vietnam
Development Forum Discussion Paper, no.9(E), August.

4. Import Substitution
To avoid policy misjudgment: For each IS industry, learn technical andmarket details in advance.
 Prepare good F/S and M/Ps.
To avoid political capture: Democratic Developmentalism: maintainstrong and effective state guidance to punish
rent seeking and encourage value creation.

5. Industrial Clusters andCorridors
5-a. There are many definitions of industrial
clusters and corridors. Applicability of each toEthiopia should be carefully examined.
Industrial clusters:(1) Interaction between top researchers andhigh-tech firms to create innovation and newproducts (Porter, Japanese METI).
(2) Promote industrial agglomeration with I/Olinkage (Flowchart Approach of Kuchiki).

(3) Concentration of SMEs in the same industrysuch as shoe, ceramics, etc (Otsuka-Sonobe).
Industrial corridors:(4) International road linking port with hinterland
and landlocked countries.
(5) Creation of new industrial regions byproviding transport infrastructure through PPP,
HRD, logistics, electronic customs & trading(Japanese METI).
(6) Food processing industrial zones (“growthcorridor” idea in Ethiopia).

5. Industrial Clusters andCorridors
5-b. The idea that related projects and programs
should be implemented collectively in certain
geographical areas is useful in building agro
food parks and other industrial zones.
- If the Food Processing Industry M/P is finalized
and approved, MOTI and MOARD should work
together to execute it.
Enhancing Core ADLIInter-ministerial coordination

6. SME Promotion
6-a. SME promotion should clarify targeted firms
and activities.
6-b. Ethiopia should re-organize and strengthen
SME policy as the core of industrialization
strategy.

6. SME Promotion- SME promotion is very popular but purpose,content and outcome differ across countries.
- In Ethiopia, almost all local manufacturingfirms are micro & small (the missing middle).
- In Ethiopia, SME policy should separately
target poverty reduction and competitiveness.
- Selectively learn from concrete and diverse
international practices in SME promotion.

Two Purposes of SME Policy
SMEs for poverty reduction(generating jobs & income)Small shops,
restaurants,workshops,
familybusinesses

General support to all
eligible SMEs nationwide

SMEs for international
competitiveness

Competitiveand laborintensiveSMEs

Globallycompetitive SMEs,
suppliers to global
firms (innovation,high technology)

Support innovative activities withselection criteria and monitoringDifferent Objectives of SME
Policy Malaysia, Thailand (FDI-led industrialization):- Reduce reliance on foreign technology andmanagement- SME promotion and internal value creation
as the core of industrial policy Japan (many large firms and SMEs):
Protection of SMEs from exploitation by largefirms  Encouraging innovation by SMEs

Malaysia’s SME Support Programs
Small and Medium Industries Development Corporation (SMIDEC)

Eligibility

Enterprises with more than 60% local capital, with annual sales lessthan RM25m, employees less than 150.

GrantsProvided for industrial linkage, business planning, product andprocess improvement, logistic services, overseas marketing,obtaining quality certification, improved packaging, design, labeling,halal products, etc.

Soft loans

Provided for factory relocation, ICT, etc.

Selection“Concept papers” submitted by enterprises are evaluated by
SMIDEC within 14 days and benefits disbursed within 20 working
days.

Monitoring

Proposed actions are monitored after 3, 6 and 12 months, andbenefits may be withdrawn if they are not implemented.

IndustrialLinkage
ProgramDatabase of 18,000 companies; annual matchmaking events with theparticipation of over 250 local suppliers and MNCs; pioneer status
with 100% tax exemption for five years and other tax privileges.

Source: K. Ohno, ed. (2006), Industrial Policy Formulation in Thailand, Malaysia and Japan, Vietnam Development
Forum, Publishing House of Social Labor, Hanoi. Also see www.smidec.gov.my/index.jsp.

SME Promotion in Japan(Late 1950s to Early 1970s)
Cooperative policy formulation by IndustrialCouncils.
 Technical support by Ministry of International
Trade and Industry (MITI), Shindanshi (enterpriseconsultants).
 Financial support by MOF, Japan DevelopmentBank (JDB). JDB also offered managerial support.
This had a catalytic effect on commercial bank loans.
 All these supports were linked.
 Firms could re-apply for JDB and SME loans--MITIand JDB coached them until they passed.
Prof. Akira Suehiro: Japan’s Post WW2
Mechanism for Industrial Support

PolicyImplementation

Ministry of International
Trade and Industry(MITI)

Ministry of Finance(MOF)
Fiscal Fund Bureau

Department of Heavy
Industry
technology advice

Japan Development
Bankmanagerial advice

Individual Firms
applied to fiscal finance

Policy Making

Business Associationsfor each industry

Government Officers,
Academicians,
Specialists

Industrial Council on SpecificIndustry or Target
Source: Drafted by Akira Suehiro

Fiscal Finance