Chapter 8

Policy Direction for the Next Five Years∗

This chapter contains ideas and issues that may be useful in drafting the trade andindustrial chapter of the Plan for Accelerated and Sustained Development to End
Poverty (PASDEP) II (2010/11–2014/15), a national planning document currently
under preparation in Ethiopia.

This paper is a sequel to the previous chapters 6 and7, which discussed cross-cutting issues and organizational arrangements forindustrial policy making.

The present chapter is more sharply focused on the

expected content of the aforementioned chapter of PASDEP II.
In recent years the Ethiopian government has made significant efforts to enhance thepolicy content of the trade and industry sector.

The Sustainable Development andPoverty Reduction Program (SDPRP) (2002/03–2004/05) did not have an
independent chapter on trade and industry comparable to those on agriculturaldevelopment, food security, education, or health.

Issues on trade and industry weredealt with lightly in a cross-cutting chapter of less than four pages.1 Subsequently,
with the adoption of the Industrial Development Strategy (IDS, 2002), PASDEP I
had an independent chapter for trade and industrial development that discussed more
extensively (over 12 pages) the vision and principles of the IDS, targets for selectedstrategic sub-sectors, integration of Ethiopia’s trade sector, export development, andprivate sector development.

Nevertheless, there is a need to further upgrade thepolicy content of the trade and industry sector during the PASDEP II period.

This

is partly because the Ethiopian government plans to enlarge the policy scope from a∗1This chapter was prepared in November 2009 by the GRIPS Development Forum (GDF) members of
the Ethiopia-Japan bilateral policy dialogue, consisting of Kenichi Ohno, Izumi Ohno, and Akio
Hosono, based on their discussions with Prime Minister Meles Zenawi, Economic Advisor to Prime
Minister Dr. Newai Gebre-ab, MOTI State Minister Tadesse Haile, and other high-level policy
makers of the Federal Democratic Republic of Ethiopia. We are grateful for the intellectual input ofthese leaders. However, the GDF bears all responsibility for the content of this document.
See VIII Private Sector and Export Development of SDPRP, especially discussions on Investment
Climate (8.1), Developing the Manufacturing Sector (8.7), and institutions (8.9, which refers topublic-private consultative forum, chambers and sectoral associations, and other institutions giving
services to the private sector).

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few export-oriented industries to include import substitution industries that havehigh domestic demand, and also because the government is strengthening policy
measures and institutions to support industry.

It is hoped that sharing our ideas andconcrete suggestions for Ethiopia’s industrial policy direction in the next five years
will contribute to the Ministry of Trade and Industry (MOTI)’s ongoing drafting
work of the trade and industry chapter of PASDEP II.
The trade and industrial chapter of PASDEP II should first review recent industrial
performance, a topic discussed in section 8-1 below. It should then clearly set policy
direction for the next five years.
8-3, and 8-4.
8-6.

This important issue is discussed in sections 8-2,

Priority sectors and priority issues are considered in sections 8-5 andAdditional topics of numerical targets and policy documents and organization

are contained in sections 8-7 and 8-8.

The last section is the conclusion.

8-1. Recent performance
During the implementation period of PASDEP I (2005/06–2009/10), overall
performance of industrial growth and exports was initially very positive, especiallyin the first three years, but later marred by the emergence of negative effects of an
overheated economy and global financial crisis—inflation, balance of paymentspressure, and an acute shortage of foreign exchange—which collectively put asignificant damper on the industrial performance in the last two years of PASDEP I.
The drafting of PASDEP II must start with reflection on this turn of events and its
implications for industrial policy formulation.
The causes of these macroeconomic difficulties will surely be analyzed by the
Ministry of Finance and Economic Development (MOFED) in the first few chaptersof PASDEP II.

The recent macroeconomic overheating may be attributed variously

and with different weights to fiscal and monetary policies, inflows of external funds,
shocks transmitted from global commodity inflation and the global financial crisis,
weather conditions, speculation, hoarding, and so on.

The assessment of thesecauses is not the responsibility of MOTI, and the topic does not have to be dealt
with in the trade and industry chapter of PASDEP II.
194

However, the consequences

Policy Direction for the Next Five Yearsof macroeconomic instability do have important bearings on the future conduct ofindustrial policy.
The recent decline in industrial momentum cannot be blamed solely or even mainlyon the low quality of industrial policy.

Unlike the health and education sectors andinfrastructure construction, whose progress largely depends on proper management
and adequate funding by the government (supplemented by foreign sources), theperformance of productive sectors such as industry and agriculture, in which
production is carried out by private agents under shifting conditions, is determinedby a combination of private effort, industrial policy, and external circumstances.
For illustration, let yt be industrial performance, xt be private effort, zt be industrial
policy and εt be unpredictable shocks due to external circumstances such as natural,political and macroeconomic events, then:yt = α xt + β z t + εtwhere α and β are coefficients that translate private effort and industrial policy into
performance.

Alternative functional forms, time lags, and interaction among

variables may be imposed on this model.

However, the key point is that the riseand fall of industrial performance cannot be traced to the movement of the policy
variable alone.

In fact, short-term fluctuations in yt are often dominated byexternal shocks εt, while private effort xt and industrial policy zt strongly influence
the long-term trend of yt.
This means that industrial policy should not be overly affected by short-term
cyclical events but should be designed and evaluated for its contribution to
long-term industrial achievements smoothed over the ups and downs of themacroeconomy.

For this reason, Ethiopia’s recent macroeconomic difficulty byitself does not give a compelling reason to change its industrial policy.2
2

In fact, theWe do not entirely agree with the view that macroeconomic difficulties such as those Ethiopia is
experiencing mainly come from the structural weaknesses or the lack of reform and liberalization of
the real sector. Macroeconomic problems should be countered mainly by macroeconomic measuresand not by industrial policy. We would at the same time like to stress that the existence of acompetitive and well-diversified manufacturing sector can mitigate the impact of global shocks. In
that sense, macroeconomic crisis may be a good reason to accelerate and enhance the existing195

CHAPTER 8

evolution of Ethiopia’s industrial policy seems generally consistent with thesituations that the country must cope with, which include current levels of policy
capability and private dynamism.

If industrial policy is to be revised, we must citeother structural reasons (see section 8-3 below).

Similarly, over- andunder-achievement of numerical targets in the industrial sector, such as output,
export, and investment, must be interpreted with care. Neither should be the causeof unsubstantiated optimism or pessimism.

To properly assess industrial policy in

the PASDEP I period, we must look for signs of structural changes (αxt + βzt) rather
than simply reporting actual numbers that contain large, uncontrollable shocks (εt).
In this respect, 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.

The manufacturing share of the GDP has remained stagnant inrecent years and the export structure continues to be dominated by unfinishedcommodities.
bases.

It is true that leather and flower exports rose rapidly from small

These were bright spots in the achievements of PASDEP I.

But these

results, however laudable, fell short of the high expectations of the leaders of theEthiopian government.3 Furthermore, many of the good industrial results may havebeen due to external circumstances (positive εt) rather than effective policy or
emerging private dynamism (αxt + βzt).

In the next five years, scientific reviews

examining both the costs and benefits of policy support for export promotion should
be conducted in preparation for industrial policy formulation.4

34

industrial policy.
The UNIDO/MOTI technical paper of May 2007, which examined the Ethiopian shoe manufacturingsector, pointed out a number of problems to be overcome for this sector to become internationallycompetitive, including the need to improve product design and quality.
Such studies were suggested by section 6-3 above, initially in September 2009. JICA is currently
exploring possibilities of review studies by Ethiopian researchers on the effectiveness of export
promotion in the recent past.

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Policy Direction for the Next Five Years

8-2. Proactive industrial policy
The basic tenets of Ethiopian industrial policy are given by the Agricultural
Development Led Industrialization (ADLI) strategy and the IDS (2002), which werediscussed and analyzed in chapter 3 of this report.

As all Ethiopian government

officials know ADLI and IDS well, there is no need to repeat their contents in the
trade and industry chapter of PASDEP II.

What that chapter should do instead is topresent the orientation, the expanding scope, and the medium-term vision ofindustrial policy for the period up to 2014/15 in order to eventually realize thelong-term goals prescribed in ADLI and IDS.
A notable feature of Ethiopia’s industrial development is that the government ispursuing an industrial policy that is private sector-driven but with strong state
guidance and directives as stipulated in IDS.

This policy orientation is different

from any of the well-known policy regimes such as socialist planning and state
production (USSR or China in the past), laissez-faire and rapid integration undersmall government (Hong Kong, Kyrgyzstan), developmental states with infantindustry promotion (Korea, Taiwan, and Malaysia), foreign direct investment(FDI)-led industrialization (Thailand, Malaysia, and Vietnam), or liberalization,
privatization and integration advocated by the Washington Consensus organizations(International Monetary Fund (IMF) and the World Bank).
Nevertheless, the developmental path that Ethiopia is following seems highly
relevant and applicable to the developing world in the 21st century.

It is for thisreason that Ethiopia’s policy orientation, repeated by its leaders and stated in IDS,
should be given a proper name and defined more precisely for visibility andinternational attention.

This will also help to avoid unnecessary misunderstandingor criticism arising from confusing this policy orientation with past developmental
regimes.
We propose the term proactive industrial policy to describe what Ethiopia aims toachieve. 55This is a strategy adopted by a latecomer country with a strong

In section 6-1 above, industrial policy was divided into three types: (i) improving business climate197

CHAPTER 8

commitment to international integration for seeking a proper balance between thestate and the market through continuous learning to overcome initially weak policy
capability.

Its key components are acceptance of market mechanisms andglobalization, dynamic learning by both government and the private sector, andcomplex and ever-changing interaction between the two sectors.

More precisely,

proactive industrial policy must satisfy all of the conditions below.
(i)Market-driven development under globalization—production, investment,
trade and other economic activities must be carried out primarily by theprivate sector under an open competitive environment generated by themarket mechanism and the globalization process. Privatization, the World
Trade Organization (WTO) rules, regional integration, and Free Trade
Agreements (FTAs) are to be positively embraced. State-owned production
is not adopted except in cases where no private agents have yet emerged
to take over the state role.

(ii) A strong state—the state assumes a strong and active role in guiding andsupporting development despite the fact that all productive activities are inprinciple to be conducted by the private sector.

The state will mobilize

necessary policies to reward value creation, punish rent seeking, and leadthe private sector toward a consistent national vision.

A greattransformation of political and economic systems must be orchestrated by
the state because the market cannot initiate such a transformation.
(iii) Retaining sufficient policy instruments for latecomer industrialization—although globalization is willingly accepted, this does not mean that allindustrial policy instruments must be instantly given up and replaced bymarket pressure.

Rather, this means that the policy toolbox for the 21st

century is different from those of Japan, Taiwan, or Korea in the past.

Italso implies that enlargement of the market sphere must be done in proper
generally and for all; (ii) responding quickly to the needs of the private sector; and (iii) creating
dynamic comparative advantage in which proactive policy makers generate new industrial strengths
and guide investors towards new activities under close coordination with private partners but without
necessarily waiting for their move. The current section expands on the last type.

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Policy Direction for the Next Five Years

steps to ensure the availability of necessary policy instruments and thatinternational pressure to open up must be consistent in scope and speedwith the development strategy of the latecomer country.
(iv) Dynamic capacity development—improving policy capability and private
dynamism, both of which are often weak in early stages of development,
must be the central component of industrial policy formulation.

Policymust identify immediate and concrete goals and aim at enhancing existingor potential strengths of the country rather than improving governance or
capacity generally without specific goals.

The policy scope and policy

measures should be gradually expanded in accordance with the enhancementof policy capability and private dynamism.6(v) Internalizing skills and technology—in the private sector, the principal
method of attaining industrialization must be internalization of skills andtechnology embodied in the human capital of domestic citizens. This must
constitute by far the most important part of industrial policy goals andmeasures.

Resource extraction, FDI, official development assistance(ODA), and ecological and geographic advantages are also important, butthey must be given positions secondary to support of skill and technology
development rather than themselves becoming main policy goals or measures.
(vi) Effective public private partnership (PPP)—when a strong state guides
the private sector, there is a risk of market distortion and suppression ofentrepreneurship, which leads to economic stagnation.

To avoid this risk,

proactive industrial policy must always be accompanied by effective
cooperation between the government and the private sector.

This

cooperation must be in substance based on mutual trust and active exchange
of information and views rather than just the formal role of hosting dialogues,
conducting BOT (Build-Operate-Transfer) projects, or establishing PPP
mechanisms.
6

Only when this cooperation is truly and firmly in place can

For more discussion on dynamic capacity development as practiced by East Asian states, see Ohno
and Ohno (2008), a paper presented at the Initiative for Policy Dialogue conference in Addis Ababain July 2008.

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the state understand the (often diverse) intentions of private firms, and thevisions and strategies initiated by the state will be strongly supported by
the private sector.

Although the state leads, the direction it imposes isexactly what private firms want or something they admit to be desirable
after the government first points out its merits.
(vii) Deep knowledge of the industry—to avoid policy misjudgment and political
capture, another important requirement for the government is accumulationof sufficient knowledge of the industries in which it intends to intervene.
Leaders and practitioners of the government must go the extra mile toacquire the practical knowledge of the industry to make intelligent andwell-informed decisions.

Knowledge can initially be outsourced fromprivate experts, academicians, or donors, but unless it is digested by policy
makers themselves, the quality of industrial policy cannot be assured.
The industrial policy formulation described above is very different from the two
extreme developmental models: socialist planning, in which the state dominates andprivate activities are suppressed, and the Washington Consensus doctrine, in which
the state recedes to the background and markets are given full sway.

Proactive

industry policy aims to strike a delicate and ever-changing balance between state
guidance and market orientation, between commitment to globalization and theretaining of sufficient policy tools, or between strong leadership and the need tolisten to private firms carefully.

As such, this policy is far more difficult toimplement than simply letting the market loose or planning everything by the statemachinery.

A comparison of the basic approach (Washington Consensus) and theproactive approach is given below.

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Policy Direction for the Next Five Years

Table 8-1. A Comparison of Two Approaches

Yes

Proactive
Approach
Yes

?

Yes

?
Yes
Yes
?
No

Yes
Yes
Yes
Yes
Yes

Basic Approach
Market-driven development under globalization
Retaining sufficient policy tools for latecomerindustrialization
Dynamic capacity development
Internalizing skills and technology
Effective public private partnership
Deep knowledge of the industry
A strong state

Policy makers may consider this to be confusing and contradictory, but one needs
complex policy formulation to deal with complex reality.

Ambivalent orientationin proactive industrial policy is not a problem but in fact its greatest strength.

Itforces policy makers to be always pragmatic, responsive and alert to changing
circumstances rather than turning a blind eye to reality for the sake of ideologicalintegrity.
Proactive industrial policy shuns abstract debates such as whether the state shouldintervene in the market or whether globalization is beneficial for latecomer
countries.

Instead, it works at much more concrete levels of policy formulation

where finding a proper mix of conflicting forces in each case is the main objective
and, therefore, one-size-fits-all solutions without reference to specificities are hardly
meaningful.

As a result, the information requirement for proactive industrial

policy is far greater than other policy regimes.

Information must be constantly

gathered and updated through studies and reports, visits and workshops, contact
with the private sector and academics, and international assistance.
Another important feature of proactive industrial policy is its dynamic perspective.
Starting from an inefficient government and a fragile private sector, it stresses
learning by both sectors as the main driver of the industrialization process.

This

implies that the policy mix must change not only in response to shifting
circumstances but also because of new capabilities acquired through effort andexperience.

Proactive industrial policy must grow continuously; it cannot exist

under static policies and rigid organizations.

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Above is a restatement of what we believe is the essence of industrial policy
towards which Ethiopia is moving.

Although the intention of the Ethiopian

government is clear to anyone who has read its key documents and conversed with
its leaders, we think it important to extract its components, detach them from theimmediate Ethiopian context, and apply them more universally to assess andcompare policies of other developing countries.

Only through this process can a

new developmental model be constructed.

We recommend that this policy

orientation be clearly stated as a model with broad applicability in the coming
PASDEP II or any other appropriate document.

8-3. Expansion of policy space and measures
Another important statement that must be made in the trade and industrial chapter of
PASDEP II is the expansion of policy space and policy measures to promoteindustrial development.

Ethiopia’s industrial policy is shifting and expanding not

only because of changing circumstances but also because the country has improved
or is improving its policy capability.

These policy shifts and their reasons should

be made clear in PASDEP II.
Improvement of industrial policy capability of the Ethiopian government is evident
from the many policy actions it has taken recently as well as the statements of its
leaders.

This is not to say that policy capability is already high; Ethiopia needs tolearn much more to become an effective industrializing country.

However, it mustbe acknowledged that the country has vigorously learned the basics of industrial
policy formulation in a relatively short period and built enough institutionalfoundations to tackle the next round of challenges.
Ethiopia had long been plagued by problems such as unfavorable weather, famine,and regional conflicts.

By around 2002, however, most of these problems weresignificantly ameliorated, if not eliminated, and the country was ready to launch aserious development strategy to realize the vision of ADLI.

It was at that time that

the IDS was drafted and the SDPRP (2002/03–2004/05), the Ethiopian version of
the poverty reduction strategy paper, was initiated.
202

The Ethiopian achievements

Policy Direction for the Next Five Years

since then in the field of industrial policy formulation can be summarized asfollows.
(i)

Policy documentation—in addition to the IDS and SDPRP mentioned above,the master plans for leather and leather products, textile and garment, foodprocessing, basic metal and engineering, chemicals, sugar, etc. werecompleted or drafted with various degrees of sophistication.

The three-year plan of the SDPRP was followed by the five-year plan of PASDEP I.
(ii) Selective export promotion—priority sectors were declared, and meat, leather
and leather products, textile and garment, and food processing were given
the highest attention and generous incentives.

Fresh flower exports werelater added to the priority list and given similar support.
(iii) Export steering committee—an export steering committee based on the
Korean model was established and its monthly meetings chaired by theprime minister functioned as a high-level instrument to monitor export
promotion and solve problems.
(iv) Industrial policy toolkit—common techniques such as benchmarking,business process re-engineering (BPR), scaling up of pilot projects, businessmatching, institutional twinning, public private dialogue (see below), etc.
have been learned and tried.

Among them, benchmarking has become apopular tool for comparing performance and setting targets for Ethiopian
manufacturing firms.

The concept of kaizen was recently added to thetoolkit.
(v) High-level technology education and TVET—to enhance engineering
capability, the government has launched a fast-track program to build anumber of science and technology universities all over the country and to
train their teaching and research staff. At the same time, a national networkof technical and vocational education and training (TVET) was establishedfor strengthening the capability of rural small and medium enterprises(SMEs).
(vi) Development centers and training institutes—as a focal point to strengthenpriority sectors and receive assistance, a number of development centers
and training institutes have been established in leather and leather products,
textile and garment, metal products, and so on.
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CHAPTER 8(vii) Public-private dialogue—a comprehensive system of public-private dialogue
at the national, regional and local levels is under construction, and industrial
and business associations to promote business activities and communicate
with official bodies are being set up and enhanced.
(viii) Public administration reform—virtually all ministries and agencies of thegovernment have gone through a restructuring process for quick response
and waste elimination by the application of BPR, a technique normally used
for businesses.
(ix) Infrastructure—transport and power, the two infrastructure services mostvital for industrial promotion, are given high priority.
(x) Strategic mobilization of ODA, FDI and academics—in all of the above
activities, the Ethiopian government has strategically approached bilateral
donors, multilateral organizations, foreign investors and foreign experts tomaximize and accelerate their contribution to the national development
vision.
Based on these achievements in policy capability building, the Ethiopian
government should now expand its policy space and measures in the following
ways.
First, the list of priority sectors should be broadened from a few export-oriented
industries to include a number of import substitution industries with high domestic
demand (and therefore high impact on reducing balance of payments pressure) andwhose technologies are relatively easy to learn.

The Ethiopian government has

tentatively identified steel and metal processing, cement, glass, chemicals andpharmaceuticals as candidates.

But a more detailed list of newly promoted

industries must be constructed with careful studies and clear selection criteria.
Second, policy measures must also be expanded.

In the PASDEP I period, greatestemphasis was placed on monthly export performance and provision of incentives toattain that goal.

Incentives are one important element of industrial policy but othermeasures that improve skills and technology more directly or manage market
failures and instabilities (such as excess competition, asset bubbles, speculation,short-termism, environmental destruction, sub-standard quality, dumping and cheap
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Policy Direction for the Next Five Years

imports, global business cycles, intellectual property infringements, etc.) should be
added and enhanced.

Over time, the latter should become dominant to give depth

and width to industrial policy while the relative weights of incentives and export
monitoring should be reduced. As noted above, Ethiopia has already started to movein that direction.

This movement should be accelerated in the next PASDEP

period.
Third, time limits and the graduation rule should be introduced.

As argued in

section 6-3 of this report, industrial promotion must always be temporary andshould be terminated when the purpose is achieved or when the targeted industry
fails to grow.

In the very early stage of industrialization (PASDEP I), thegraduation clause was unnecessary because industrial promotion was just started
and no industry had grown enough to warrant graduation.

In the future, however,serious assessment of the export-oriented industries that have enjoyed generous
incentives and the import substituting industries earmarked for promotion is highly
desirable.

Even if it turns out that no termination of policy support is needed

during the PASDEP II period, proclamation of time limits and the graduation rule inadvance is essential for avoiding policy misjudgment and political capture.
In this connection, it is important to build policy capability and analytical method tobe able to routinely evaluate the costs and benefits of any promoted industry fromthe perspective of both static and dynamic policy impacts.

Moreover, promotion

measures should be available to all eligible enterprises until the time of promotion
expires without asking whether they are early innovators or latecomer copycats
because such discrimination is both unfair and operationally impractical.7
With regards to proactive industrial policy, this can be restated as follows.

The

capability of government must be strengthened as the policy scope is expanded from
(1) to (3) in Table 8-2 below.

Since import substitution entails increased risks ofpolicy misjudgment and political capture, more attention must be given to (i) time
limits of promotion and the graduation rule, (ii) competitiveness and value creation,(iii) clear selection criteria for priority sectors, and (iv) master plans and action

7

This is a negation of Prof.
6-3 above.

Rodrik’s “pioneers only” rule.

205

For more on this argument see section

CHAPTER 8plans with effective implementation mechanisms.
Table 8-2. Two Approaches to Export Promotion and Import Substitution
Basic Approach
Proactive Approach(1) Liberalize, privatize, open up, (2) Policy skill and in-depth
Export Promotion
level playing fieldindustrial knowledge required
Import(3) Strong policy skill and in-depth(1) (Same as above)
Substitution
industrial knowledge required

8-4. Internalizing skills and technology
We would like to propose the following as the most important achievements that
Ethiopian industries should aim for in the next five years.
Medium-term industrial vision: internalization and scaling up of skills,
technology, and other capabilities that support the competitiveness and value
creation of the manufacturing sector.
Ethiopia should broaden its operational policy scope from the current one centeredon export target-setting to skill-intensive industrialization that highlights
competitiveness and internal value creation.

This should apply to both

export-oriented industries and import-substituting industries.
Ethiopia should strengthen domestic capabilities of both the private sector and thepolicy making mechanism.

For this purpose, appropriate targets, both numericaland qualitative, should be agreed on for building these capabilities (however, seealso section 8-7 for caveats in setting numerical targets), necessary programs andinstitutions must be launched or enhanced, master plans and action plans must be
drafted (section 8-8), and implementation should be followed up with an effective
monitoring mechanism.

Success must be scaled up by a well-establisheddissemination procedure across sectors and regions, and ODA and foreign
enterprises must be mobilized strategically.
In this regard, the Ethiopian government has already identified skills and technology
206

Policy Direction for the Next Five Yearsas the main pillars of industrialization, and policy efforts to enhance them havealready been started.
period.

Certain initial results have been gained in the first PASDEPAs explained, the government has come to use many policy tools such as

benchmarking and BPR, building technology universities at full speed,
establishment of the Metal Products Development Center, the Leather and Leather
Product Technology Institute and the Textile and Apparel Institute, and requiringthat ODA projects be accompanied by staff training and maximum local
procurement.

These laudable efforts should continue and be further strengthened

along with the expansion of industrial policy space.

Our suggestion is to clearly

declare this policy orientation in PASDEP II and further develop and adjust it(where necessary) on the basis of initial attainments.

8-5. Priority sectors
As argued in section 8-3, it is important to clearly state the new (and continuing)
priority sectors for the next five years in the trade and industry chapter of PASDEP
II.

Although the IDS listed five priority sectors (textile and garment; meat, leather

and leather products; agro-processing; construction; micro and small scale
enterprises), Ethiopia may modify this list in response to the outcome of past
promotion, rising policy capability, or changing domestic and internationalsituations.

For each priority sector, targets and policy orientation for the PASDEPII period should be spelled out.
The following export-oriented industries can continue to be supported in the next
five years:
Leather and leather products
Agro-processing
Textile and garment
Floriculture
However, there should be studies to review the performance of these industries in
response to policy support and to evaluate the static and dynamic costs and benefitsof policy support (especially for leather and leather products, sugar, garment, and207

CHAPTER 8

floriculture).

The amount of incentives received also differed across theseindustries.

These sectoral studies will inform the policy makers as to how

intensively and in what form policy support should be continued for each of theseindustries.

For agro-processing, the concrete mix of targeted crops or products

should be re-examined (including performance review on the sugar industry).
Duration of additional policy support is also in question.

If the industry is

considered to have grown sufficiently or to have failed to grow despite generous
support, policy support should be terminated.

It is premature to end support to anyof these export-oriented industries at present or perhaps even in the next five years.
But the conditions of graduation can be generally stated in advance because
promotion measures cannot be provided endlessly.

Even if the proposed sectoral

studies cannot be completed by the time PASDEP II is approved, MOTI should
continue to adjust its promotion measures for these industries in the course of
implementing the trade and industry five-year development plan.
The following import substitution industries may be added to the priority sector list:
Steel
Metal processing
CementGlass
Consumer soap and detergent (“chemicals”)
Popular medicine (“pharmaceuticals”)
Other
We are not recommending the designation of all of these as priority sectors. This is atentative list to be finalized after more information is gathered, sufficient discussionis held among all stakeholders, and policy makers become confident about theirdecisions.

For each candidate industry, a preliminary feasibility study should be

conducted. Based on its result, the Ethiopian government should determine whether
the industry deserves policy support.

If the answer is affirmative, a full-fledged

master plan with detailed action plans should be drafted.

Special attention must be

paid to sharing enough technical and market information about the targeted industry
among key decision makers and establishing mechanisms to prevent policy
misjudgment and political capture, which are the two most common risks of import
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Policy Direction for the Next Five Years

substitution (section 6-4).

Given the time needed to build new policy capability

and receive external assistance, the drafting of master plans for import substitution
industries should proceed in realistic steps, with one or two industries at first, to beaccelerated to cover all industries in the medium to long run.

It is desirable for all

master plans to be completed by the end of the PASDEP II period, but that should
not be a rigid requirement.

Building true policy capability is more important thanspeedy drafting of all master plans with low quality.
Due to time constraint and lack of information, MOTI may not be able to adequately
specify concrete targets and policy measures for all of the priority industries within
the drafting period of PASDEP II.

MOTI should do its best with the currently

available data to set targets and leave the task of giving more details and making
adjustments to the five-year industrial plan and the sectoral master plans to follow.

8-6. Priority issues
In the PASDEP Annual Progress Report 2007/08, progress is reported in thefollowing issues related to trade and industry:Privatization
WTO accession process
Negotiation for Economic Partnership Agreement
Export performance
However, grounds covered by these topics are narrower than expected on the basisof the important role given to industrialization in the ADLI vision or proactive
industrial policy proposed in the present chapter.

In the next PASDEP, we advisethat issues that are closely related to the enhancement of competitiveness, industrial
human resources, logistic efficiency, and industrial linkage and structure—these arein our opinion core issues in latecomer industrialization—be highlighted andstressed (section 8-4).

The topics presented below are our tentative suggestions.

Other issues that are equally important in leveling up private industrial capability
can also be discussed.

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CHAPTER 8(i)

Quality-based competition—while benchmarking has taken a strong holdin Ethiopia as a method for comparing and setting targets for productivity
improvement, excessive reliance on it may be harmful.

Althoughbenchmarking can handle quantity-based competition very well (for instance,
raising worker productivity from cutting 175 shoes to 300 shoes per day),sources of value and competitiveness can also emerge from producing
customized products in small lots and many variations, ensuring “only one
in the world” quality at high cost and price, creating national brands, orproviding excellent customer service.

In some cases, quantity-based

competition runs the risks of cut-throat price war, shrinking profit, directcompetition with Chinese products, and inability to invest in innovation.
Ethiopia should pursue both quality-based competition and quantity-based
competition depending on product type and targeted markets.

Too muchemphasis on the production of undifferentiated commodity products at low
cost will constrain the future path of industrialization.

Policy tools for

quality-based competition such as kaizen, branding, strategic marketing,design training, and so on, should be strengthened.8(ii) Matching industrial human resources with demand—Ethiopia is building
new technology and engineering universities at great speed. This is a highly
commendable move, because young people equipped with frontline skills
and technology are undoubtedly the foundation of industrialization.

But

demand for this human capital must be prepared along with the dramaticincrease of the supply. A common problem in many developing countries
is the unemployment of professionals due to the limited size of domestic
sectors that can gainfully hire them.
brain drain to advanced countries.

This generates strong pressure for

Another problem often encountered in

East Asia is the mismatch of graduating students with company needs.
While many young engineers are produced, FDI firms are not satisfied
8

Two of the Ethiopian agro-products with high raw material quality are leather and coffee. Theircommercial value in the global market can be greatly improved if proper design, processing,marketing, and branding are conducted. According to a Japanese high-quality leather and fur
company, Ethiopian sheep skin is the best in the world in its softness, thinness and beauty but tomaximize its potential requires very high processing and cutting skills. For such a product, kaizen,
which can pursue endless improvement, is better suited than benchmarking.

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because these engineers do not have the skills and knowledge they require.
This is caused by outdated teaching materials and equipment, untrainedteachers, and the lack of industry-university collaboration in building thecurriculum. If these demand-side issues are neglected, Ethiopia may facesimilar difficulties when a stream of new engineering graduates comes into
the labor market several years from now.

Ethiopia must think harderbecause it does not yet have a large agglomeration of manufacturing FDI
firms craving talented young staff and workers.
(iii) Agriculture-industry linkage—this is key to the success of Ethiopia’s
industrialization as envisioned by ADLI.

So far, such links are beginningto form in the leather industry (from domestic hide and skin to leather
products) and some agro-processing industries (for example, sugar, nutrition
food, edible oil, macaroni and pasta), but the scale of these links remain
small. In the next five years, serious policy effort should be made in agroprocessing industries to enlarge the existing links and to create new ones.
For this purpose, the quality and content of the agro-processing industry
master plan and action plan, as well as effective cooperation between MOTI
and the Ministry of Agriculture and Rural Development (MOARD), arecrucial.
(iv) Geographical aspects of industrialization—the importance of the road sector
is highlighted in the current PASDEP, but policy interest must be expanded
beyond the construction of transport infrastructure to include other spatialaspects of industrialization.

In the next PASDEP period, attention shouldbe paid to, for example, (i) logistic performance of the Addis Ababa—Akaki
area, which is the nation’s largest industrial zone (especially time and cost
aspects of access to Djibouti Port, including the possibility of building arailway connection); (ii) policy criteria for creating and operating industrial
estates; and (iii) initiation of the construction of Growth Poles and Growth
Corridors as overall regional development, which encompasses agriculture,agro-processing, water management, tourism, and related manufacturing
and services.

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8-7. Numerical targets
Numerical targets will be required for each sector in PASDEP II.

In fact, MOFED

is asking for a more systematic list of numerical targets for the trade and industry
sector than in PASDEP I. In principle, the use of numerical targets is not only
acceptable but also highly desirable for ensuring implementation. However, theimportant question is which indicators are chosen as targets and at what levels they
are set.

To make numerical targets meaningful, serious deliberation is needed.

Mechanical and careless choices will be harmful to industrialization, as they distract
policy makers’ attention from their true objective.
In the current PASDEP, most of the targets in the trade and industry sector are
expressed in growth rates, shares of GDP, or export earnings in USD.
them count numbers of policy actions taken or firms supported.

Some of

Tables 8-3 and 8-4

show respectively the numerical targets and major achievements by 2007/08 in the
trade and industry sector as reported in the PASDEP Annual Progress Report
2007/08:
Table 8-3. Current PASDEP: Numerical Targets Related to Industry
Baseline(end 2004/05)

Target(2009/10)
11.5(average)

Growth rate of industry value added (%)

8.1

Share of industry in GDP (%)

13.6

16.5

Revenue generated from industrial export (leather
and leather products) (USD million)

63.73

500

Source: PASDEP Annual Progress Report 2007/08 (MOFED draft, 2009, p.121).

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Table 8-4. Current PASDEP: Major Achievements in Trade andIndustry by 2007/08
1. Textile and garment Encouraging steps have been observed; 71 projects were atdifferent stages of operation. Export earnings recorded
USD 14.5 million (15.1% higher than previous year).
2. Tanning industry
Support has been provided in manpower, machinery, market
access and other areas. 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 871,000tons); Messebo produced 950,000 tons (18% higher than theprevious year); five new plants produced 146,833 tons. Dueto construction boom, supply gaps emerged and 613,767
tons of cement was imported in 2007/08.
6. Floriculture
Flower farms reached 922 ha (43% increase over previousyear); flower export reached USD 111.7 million (against thetarget 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 with different modalities, etc.
8. Export earning
Export in 2007/08 was USD 1,481.4 million (25% higher thanprevious year), 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 2007/08 (MOFED draft, 2009, p.16). This is a summaryof more detailed discussion of achievements and challenges in the main text of the Report (pp.83–88).

Purely quantitative targets expressed in percent or USD million, without examining
the quality of such achievement, are still useful because they can visualize theprogress of industrialization in concrete and comparable numbers—just as the finalscores of a football game.

Developing countries often use these targets in theirindustrial policy formulation.
also carries risks.

However, mindless obsession with such numbers

Ethiopia should broaden the scope of industrial targets byintroducing more indicators for skills, technology and other internal capability inaddition to the traditional “macro” targets.

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Three questions should be asked before including numerical targets in any planningdocuments.
First, it must be asked whether the indicator in question properly belongs to thedomain of government or the domain of market in the context of a specific industrial
sector in Ethiopia.9

If a certain outcome is mainly determined by market forces, or

if micromanagement by the government only complicates business decisions, thegovernment should stay out.

In most circumstances, outcome is determined jointly

by market forces and industrial policy.

In such cases, targets may be set but resultsmust be interpreted with balance and care.
As argued in section 8-1, industrial performance, such as growth rates and export
earnings, is a function of private effort, industrial policy, and uncontrollable shocks(which may be positive or negative).

The last term dominates in the short run

while the first two largely determine industrialization in the long run.

In themedium run of PASDEP’s five-year horizon, all of these matter, but shocks comingfrom political, climatic, macroeconomic, and global events still have significant
influence.

In the current PASDEP period, for example, domestic macroeconomic

overheating and the global financial crisis impacted industrial performance.

Forthis reason, the actual growth rate or industrial export earnings should be treatedwith care.

High growth in the early years should be somewhat discounted andsubsequent slowdown should not be blamed entirely on MOTI.

These targets

should be indicative ones that call for careful interpretation and review rather thanthose that carry legal responsibility and force assigned ministries to attain them by
all means.
Second, qualitative goals must be translated into proxy variables that are bothmeaningful and quantifiable.

For example, skills and technology embodied inhuman capital are hard to measure directly but can be counted in the number ofgraduates from engineering universities, the number of patent applications, R&D
9

As a general rule, the domain of government should be relatively small if the industry is not
capital-intensive, the market and prices are volatile, the industry produces final consumer goods, thedomestic private sector is highly developed, policy capability is weak, or public private partnership isfragile—and vice versa (see section 9-4 below).

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expenditure, and so on.

Similarly, the international competitiveness of anenterprise may be gauged by its output and export growth, the International
Organization for Standardization (ISO) certificates, quality awards, the number offoreign business partners it has, and so on.

While these proxy variables are useful,

there is always a gap between true performance and these “achievements” due toquality problems, distorted incentives, or measurement errors.

Again, care must be

exercised to avoid mechanical interpretation.
Third, goals and timetables must be set properly.

They must be both ambitious andrealistic in the sense that serious joint effort by the government and the private
sector should be able to attain them, barring unexpected large negative shocks.
The timetable must also be such that it accelerates joint effort. If the goal is too highor the timetable is unreasonably short, the target is unattainable by any effort andbecomes meaningless.
development.

It only generates buck passing without any industrial

To put it differently, numerical targets should not be set politicallyor haphazardly; they must be backed by good situation analyses, demand forecasts,
and sound judgment about Ethiopia’s dynamic capability.

Various numericaltargets contained in Ethiopian policy documents should be scrutinized from thisperspective.

For example, the textile and garment industry is said to be unable toattain the export target of USD500 million per annum by 2009/10 by a wide margin.
One of the many reasons for this “failure” is that the target was set unrealisticallyhigh in its master plan.

Reconsideration of the target is required among otherpolicy actions.
Additionally, it is necessary to ponder how many industrial targets should go into
PASDEP II.

It is not a good idea to overcrowd PASDEP II with too many targets

that should properly belong to the five-year industrial plan of MOTI or master plans
and action plans of individual priority sectors.

8-8. Policy documents and organization
As industrial policy scope is expanded, organizational reform of MOTI becomes
necessary.

This must be undertaken from the viewpoint of ensuring policy quality215

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and substance rather than from the angle of administrative and procedural efficiency
pursued by the BPR.

Although the trade and industry chapter of PASDEP II does

not have to include discussion of this internal reform, it is nonetheless important tocarry it out so that the working of MOTI will be strengthened to take up the newchallenges.
First, master plans of priority sectors and priority issues must be drafted or revised.
PASDEP II may wish to declare that all existing industrial master plans will berevised with new content and structure, and new master plans will be drafted for theremaining (new) priority sectors in appropriate steps in the next several years (notnecessarily by the end of the PASDEP II period).

This includes both

export-oriented industries and import substitution industries (section 8-5).

Allmaster plans must be equipped with an action plan matrix with sufficient detail andan effective monitoring mechanism.

For priority issues (section 8-6), master plans

with practical action plan matrices must also be drafted.

The speed of master plan

drafting and revision must be adjusted so as to allow MOTI to improve policy
making capacity significantly while avoiding the risk of the process becomingsuperficial and mechanical due to too much time pressure.

By 2014/15, several

master plans for priority sectors and priority issues should be prepared.
Second, MOTI’s policy organization must be upgraded to cope with the following
tasks, which will become important in the PASDEP II period.
(i)

Cross-cutting issues applicable to all industrial sectors—this includes
benchmarking, kaizen, quality standards and control, environment regulation,and other common industrial issues and tools to assist all types of enterprises.

(ii) Integration of trade policy and industrial policy—this is essential for draftinga strategy for trade and investment liberalization, which are closely linked
with industrialization strategy, as well as for strategic WTO accession.
(iii) Inter-ministerial coordination—regular and substantive cooperation with
MOARD is crucial in promoting agro-processing or leather industries andcreating industrial corridors.

Cooperation with other ministries such as

MOFED, the Ministry of Science and Technology (MOST) and the Ministryof Education (MOE) should also be firmly established.
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Policy Direction for the Next Five Years(iv) Public-private dialogue (PPD)—new institutions for national and regional
PPD are being constructed.

MOTI must use this framework effectively

to produce concrete results in public private cooperation.
(v) Development centers and institutes—sectoral departments should be
upgraded as need arises to “development centers” or “institutes” withenhanced staff and budget so they can handle master plan revisions, action
plan monitoring, PPD, enterprise support, etc. more effectively.

Also onan as-needed basis, similar centers or institutes should be established tohandle cross-cutting issues (see (i) above).
Generally speaking, MOTI needs more “horizontal” mechanisms among its
departments and vis-à-vis other ministries to combine and coordinate different
functions.

This will complement the existing “vertical” line of commandemanating from the top.

This can be accomplished in various ways including

high-level meetings strongly directed by the Minister, a support team under the
Minister to oversee all ministerial affairs, frequent inter-departmental meetings, orcreation of more “horizontal” (functional) departments.

8-9. Conclusion
To sum up, our suggestion is that the trade and industry chapter of PASDEP II
should have basic ingredients as shown in Table 8-5 below.

Wording, ordering,

and addition and subtraction of contents remain flexible and the ultimate decisionrests with the Ethiopian government in general and MOTI in particular. Since space
devoted to trade and industry in PASDEP II is limited, these must be written
compactly in several pages or, at most, ten pages.

In policy documents like this,the important thing is what is said and not how long it takes to say it.

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Table 8-5. Possible Ingredients of Trade and Industry Chapter
Review of industrial performance [5-1](5-7)
Medium-term orientation and vision
Proactive industrial policy [5-2]Expansion of policy scope and measures [5-3] (5-5) (5-6)
Internalizing skills and technology [5-4](5-7)
Priority industries (possibly with targets) [5-5](5-7) (5-8)
Export-oriented industries
Import substitution industries
Priority issues (possibly with targets) [5-6] (5-7) (5-8)
Quality-based competitiveness
Matching industrial human resource with demand
Agriculture-industry linkage
Geographical aspects of industrialization, and others
Note: Numbers in square brackets indicate the most relevant section of this chapter andnumbers in round brackets are sections with supplementary relevance.

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