TOWARD INDUSTRIALIZATIONWITH QUALITY
Remaining Issues at the End of Ethiopia-Japan
Industrial Policy Dialogue Phase 2

Kenichi Ohno
National Graduate Institute for
Policy Studies (GRIPS)
Addis Ababa, October 2015

Ethiopia-Japan Industrial Policy Dialogue
2008

2009

2010

2011

2013

2012

2014

2015

2016 ・・・

PM Hailemariam

PM MelesIndustrial Policy Dialogue
Preparation

Africa Taskforce
Meeting Jul. 2008

JICA’sIndustrial
Cooperation

Phase 1 (2009-11)

Official launch
Jun. 2009

Phase 2 (2012-15)

Final session
May 2011

TICAD V

Start
Jan. 2012

Final session
PM Abe visit

Oct. 2015

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: Black boxes indicate three-level policy dialogue in Addis Ababa (PM, ministers, operational level).

Activity Record
Preparation (2008-2009)—3 meetings with PM Meles
Phase 1 (2009-2011)—8 High Level Forums
DD, ADLI, East Asian policy methods, steel & metal survey, kaizen,
national productivity movements, GTP1

Phase 2 (2012-2015)—8 High Level Forums
Export promotion, champion products, FDI attraction, FDI linkage &technology transfer, light manufacturing vision, handholding,industrial zones, national branding, GTP2
Substantive meetings with PM Meles (10 sessions) and PM
Hailemariam (11 sessions) Policy study missions dispatched to 7 African countries and 8 Asian
countries (not counting Ethiopia & Japan)
 High-level policy letters—13 letters to/from PM, 5 letters to otherleaders
Final Report: Main Review Paper
Part I. Background and Overview
1. Policy evolution
2. Where Ethiopia stands
3. Three business advantages
4. The Flying Geese pattern
5. Avoiding a future trap
Part II. Basic Direction
6. FDI-led industrialization
7. The wage-productivity nexus
8. Industrial policy timeline
Part III. Key Policy Components
9. Kaizen & national productivity
movement
10. Industrial parks

11. Linkage formation
12. Handholding
13. Champion products andnational branding
14. General business climate
Part IV. Assessing GTP2Part V. Action Plan for Japanand Ethiopia

BASIC DIRECTION

Where Ethiopia Stands Now
The Ethiopian government is fast, dynamic, and result-oriented.
Will to industrialize is strong and pervasive.
 Active policy learning & experimentation—especially from East
Asia but also from anywhere if useful.
 Policy leads and responds to new economic situations. At
present, for attracting quality manufacturing FDI inflow,industrial zones are selected as key policy focus.
However,
 Ethiopia’s achievement is still limited in income, manufacturing,and FDI accumulation & linkage.
 Though improving, industrial policy capability is still low andneeds to be enhanced significantly.
 Business climate is very poor by international standards.
Flying Geese Pattern of East Asia
East Asia industrialized as industries were passed from advanced
countries to latecomers via FDI (yellow arrows).


Latecomers always
start with garment &simple assembly.
Some flying geese
are now looking toEthiopia as the next
destination of lightmanufacturing.
If that happens in
sufficient volume, itmeans East Asia’s
production network
has reached Africa(also from India, EU& US).

Bangladesh,
Cambodia,
Myanmar…
Ethiopia?

Avoiding a Middle Income Trap
A middle income trap is a situation where growth is generated
by given advantages (natural resources, aid, FDI, big projects,etc.) and not by internal value creation of domestic firms andcitizens.
 Ethiopia, even at low income, should start worrying about thetrap because it could happen at any income. It is just that thetrap becomes more visible at middle income (growth slowdown).
 Ethiopia’s double-digit growth seems to have been driven byliberalization, FDI, ODA, public investment & property bubbles.
The growth source must shift to productivity, competitiveness,and emergence of new industries.
Why Do Countries Diverge?
Country that creates internal value
through human capital upgrading

Per capita income

SingaporeHigh
Korea,
TaiwanJapan

Malaysia,
Mauritius

MiddleInitial growth byliberalization,
privatization,
integration

Ethiopia,
RwandaThailandCambodia

Indonesia
VietnamLow
10-20 years

Criticalpoint in
history

Middle income trap

Country that grows by given
advantages only – natural
resources, trade opportunity, FDI,
ODA, big projects, asset bubbles;
little creation of internal value

TimeStages of Catch-Up Industrialization
Creativity
STAGE FOUR

Technology
mastery
Agglomeration(acceleration of FDI)
STAGE TWO

Arrival of
manufacturing FDI

STAGE ONESTAGE ZERO
Monoculture,subsistence
agriculture, aid
dependency

Preindustrialization

Simplemanufacturing
under foreign
guidance
Bangladesh,
Cambodia,
Myanmar, Laos,
Ethiopia?

Have supporting
industries, but
still under foreign
guidance

Management &technology
mastered, canproduce highquality goods
Taiwan, Korea

Internalizing
parts &
components

Japan?

Singapore(regional trade &financial center)

Malaysia,
Thailand

Vietnam,Indonesia,
Philippines

Initial FDI
absorption

STAGE THREE

Full capability ininnovation and
R&D as global
leaderGlass ceiling forSoutheast Asian nations(middle income trap)

Internalizing
skills &technology

Internalizing
innovation

Malaysia: Manufacturing ＋＋
Horizontal expansion to cover more value-creating processes& upward improvement along the entire curve.

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, andthe website of the Ministry of International Trade and Industry of Malaysia.

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

Hypothesis—the lack of quality in industrial policy is the maincause of a middle income trap.
Corollary—proactive industrial policy to support value creation of
the private sector is required to escape the trap.
Preliminary analysis—comparison of 13 governments in Asia andAfrica shows that:
Policy quality differs greatly across countries.
 Policy quality is highly correlated with per capita income (+0.815).
 Within each country, quality of various policy components is similar.
 Resource endowment does not seem to affect policy quality.
The Scorecard for Ethiopia
Date: October 2015 (based on policy research 2008-2015)
Evaluation of industrial policy sub-components
Supporting
Productivity,
industries &Standards
technology &FDI-local
and testing
innovation
firm linkage

Industrial
human
resource

Domestic
enterprisedevelopment

BusinessclimatePower andlogistics

Exportpromotion

Strategic FDI
marketingIndustrial
parks

Policy ownership

5

3

3

4

5

5

5

3

5

2

4.0

Vision & commitment of top
leader(s)

5

3

3

4

5

5

5

4

4

3

4.1

Policy drafting procedure

2

1

2

2

3

4

4

1

3

2

2.4

Authority & capacity of policy
organizations

3

2

2

3

3

4

5

2

2

2

2.8

Mindset & competency of
individual officials

3

2

1

2

4

4

4

2

3

2

2.7

Budgeting & staffing

4

2

2

4

5

5

5

1

3

2

3.3

Inter-ministerial coordination

1

1

1

3

3

3

3

2

3

1

2.1

Involvement of key non-official
stakeholders

2

2

2

3

3

3

3

2

3

2

2.5

Monitoring & evaluating
mechanisms

3

1

1

2

5

5

5

1

3

2

2.8

Impact on real economy

2

2

0

4

3

5

5

2

3

2

2.8

AVERAGE

3.0

1.9

1.7

3.1

3.9

4.3

4.4

2.0

3.2

2.0

3.0

GRADE

B

D

D

B

B

A

A

B

B

C

B-

RemarkTVET,
engineering
universities

Fragmented

Limited action
to improvebusinessclimateInfrastructure
still deficient
but improving

Good policy;
executionneeds more
improvement

Main policy
focus; goodresults

Main policy
focus

Policy will
exists; further
development
requiredStrong politicalwill; kaizen &national
movement

TIDI, LIDI, etc.;
but generally
underdeveloped

Average

Notes:- Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent).
- Evaluation of policy prepared and implemented by government only; results obtained by private effort, international cooperation or external conditions are not included.
- Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1).

International Comparison of Industrial Policy Quality
Evaluation of industrial policy sub-components
Date ofresearch

Domestic
Industrial
enterprise Business
humandevelopm climate
resourceent

For reference only

Doing
Per capita
SupportingPower
Strategic
Business
Productivity, Standards Average Grade
ExportIndustrial industries &incometechnology &
and
FDI
and
ranking (WB,
FDI-local
promotion
parks
(WB,
2013,
innovation
logistics
marketingtesting
2014, among
firm linkage
USD)
189 entries)

SingaporeAug.-Sep.
2010

5

4

5

5

4

5

5

4

5

5

4.7

A+

$55,183

1

Japan

Continuous

5

5

4

5

4

3

3

…

4

5

4.2

A

$46,330

29

Korea

Nov. 2010

5

4

4

5

5

3

4

…

4

5

4.3

A

$25,977

5

TaiwanMar. 2011

5

5

5

5

3

4

5

…

5

5

4.7

A+

$22,597

19

Malaysia

2006, 2010,
2013

3

4

4

5

4

5

4

1

4

4

3.8

B

$10,538

18

Mauritius

Oct. 2012

4

4

4

4

4

5

4

3

4

3

3.9

B

$9,47828

Thailand

2005, 2009,2013, 2015

3

2

4

4

3

4

4

4

2

4

3.4

B

$5,77926

Indonesia

Jun. 2014

2

2

2

2

2

3

1

1

1

2

1.8

D

$3,475114

VietnamContinuous
since 1995

1.5

1.8

2.0

2.8

1.6

1.7

2.2

1.5

1.4

1.5

1.8

D

$1,91078

India

Sep. 2012

1

1

1

2

3

1

2

1

1

1

1.4

D

$1,498142

Cambodia

May 2015

0

1

4

3

1

2

3

0

0

1

1.5

D

$950

135

RwandaAug. 2014

2

2

4

3

3

4

4

2

2

1

2.7

C

$639

46

Ethiopia

Continuous
since 2008

3.0

1.9

1.7

3.1

3.9

4.3

4.4

2.0

3.2

2.0

3.0

B-

$505

132

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 first decimal 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 dependingon which measures are evaluated and how much weight is given to past achievements relative to present policies.

Mean

SD

Per capita Doing Businessincomeranking among(WB, 2013, 189 entities
USD)(WB, 2014)

Singapore

4.70

0.48

$55,183

1

Japan

4.22

0.83

$46,330

29

Korea

4.33

0.71

$25,977

5

Taiwan4.67

0.71$22,597

19

Malaysia

3.80

1.14

$10,538

18

Mauritius

3.90

0.57

$9,47828

Industrial policy
quality

Industrial Policy Quality:
Summary
Log of per capita income

SingaporeJapan
Taiwan
Korea
Malaysia
MauritiusIndonesia

Thailand

3.40

0.84

$5,77926

Indonesia

1.80

0.63

$3,475114

Vietnam

1.80

0.43

$1,910

78

India

1.40

0.70

$1,498142

Cambodia

1.50

1.43

$950

135

Rwanda

2.70

1.06

$639

46

Ethiopia

2.95

1.02

$505

132

India

Cambodia

Thailand

Vietnam?

RwandaEthiopia

Industrial policy quality score(Correlation = 0.815)

ManufacturingvisionBecoming a leading nation in light manufacturing in Africa
in particular and in manufacturing in general

Manufacturing
targets for 2020 &2025- GDP share of 8.0% (12%?) (GTP2) and 20% (GTP3)- Export share of 20% (GTP2) and 40% (GTP3)- Employment of 1 million (GTP2) and 2 million (GTP3)

Policy areas (for FDI-linked technology transfer):
1. Targeted attractionof FDI & foreign buyers

2. Local enterprise
capacity building- General improvement ofbusiness climate- 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 (& export agency)- Kaizen & EKI- Management & marketing- Benchmarking- Export promotion including
champion products- Sector-specific technology
support- Enhancing TIDI, LIDI, MIDI…
- Handholding- SME finance

3. Linkage policy- Effective network oflinkage organizations- Incentives & policy
support for linkage &TT- Matching with buyers,
OEM & JV partners

Policy areas (cross-cutting):
4. Efficient logistics- Transport infra.
& system- Fast & reliable
customs, etc.

5. Industrial HR- TVET- Universities- Industry-univ.
cooperation

Function

Now

Intermediate
solution

Final solution

SME
support

TVET, Femseda, Remseda,
System and master plan arelaid out but support functions
remain weak

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

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

Large &
mediumenterprise
support

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

Well-developed
sectoral & functional
institutes; effective
handholding

FDI
marketing& investor
services
Industrial
zones

EIC & one-stop service
being strengthened; top
sales; Business Diplomacy
Enhancement under way
IPDC created & expanding;BL1&2, Hawassa, Dire Dawa,
etc.
Currently prioritized
Very little up to now

Strengthen existing
institutes; train experts;
improve technicalsupport functions; startpilot HH
Enhance and expand
EIC’s functions incl. onestop service, matching,post-investment support
Improve IZ & service
quality; increase private
developers
MOI & sectoral institutes
to launch pilot linkage;offer incentives; possible
JICA & HIDA support
Build integrated export
promotion policy &organization; enhancefunctions & programs

FDI-local
linkage &technology
transfer
Exportpromotion

Export Steering Committee;
MOFA, MOI, MOT, MOA;
sectoral institutes;
EIC to expand functions?;
champion products & national
branding
Still fragmented

EIC with full functions
accompanied by top
sales diplomacy
Quality & quantity of
IZs ensured; less state
involvement
Full linkage programsby MOI & sectoral
institutes

Full-fledged export
promotion withstrategic support &champion products

CONCRETE ISSUES

1. Wage and Labor Productivity
In Southeast Asia, annual wage increase is often much greaterthan labor productivity growth (less than 5% for most countries, 89% for China). Wage competitiveness is being eroded.
 Ethiopia’s current main attraction for FDI is labor advantage. Thisadvantage should be jealously guarded.


Wage & labor productivity should be measured & published regularly.
 Labor productivity growth of 5-10% per year should be targeted.
Ethiopia’s actual performance was 2.7% during 2000/01-2010/11(measured by the growth of manuf. real VA/manuf. labor).
 Real wage increase should be equal to labor productivity growth.
 Management, labor, and government should each make utmost effort
to raise productivity, and share the fruits of growth fairly (Singapore’sCharter for Industrial Progress, 1965; Cambodia & Indonesia are
currently exploring such a scheme).
 Anticipate and solve new problems—urban labor shortage, labormismatch (sector & quality), protecting workers’ rights & welfare…
Monthly Worker Wage in 2015: Ethiopia vs. Asia

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

2. Industrial Policy Timeline
FDI policy must shift from quantity (attracting thousands of FDI
firms) to quality. Business climate should be improved first,
then value creation must be supported.
 Heavy industries with large domestic demand (construction
materials, chemicals, etc.) can be promoted but selectively andconditionally. Private firms with competitiveness should invest.
 Quality manufacturing (within light manufacturing & selectedheavy industries) and quality infrastructure must be targeted.
 A long-term liberalization roadmap should be prepared at proper
speed—financial service, foreign exchange, land transport,
telecom, domestic trade, etc.
 MOI (with EKI, TIDI, LIDI, MIDI…) should be strengthened andproduce good results in industrial HR, manufacturing SMEs,
kaizen, handholding, matching & linkage, technology support…
GTP2 Draft (pp.28-30, English)
Strategic directions of Industry:- Light manufacturing which is labor-intensive & benefiting citizens,globally competitive & leading in Africa, and environment friendly- Development of strategic heavy industries- High-tech industries- Studies to identify future growth industries
Issues: Only a small weight to “light manufacturing vision” (No.1 in Africa)?
 Transition from simple to high-tech/high-value industries is necessary,
but its timing must be properly chosen: Malaysia ($10,538) & Thailand($5,779) are making effort now (upper-middle income); Vietnam($1,910) is hardly able to do it (lower-middle income).
 Meaning of “high-tech”—it is not a product but a process. Frozen
shrimp is more “high-tech” (strict hygienic standard, traceability, cold
chain) than smart phone assembly (similar to garment & footwear).

3. Kaizen
Japan is happy to see Ethiopia progressing toward advanced
kaizen, national movement, training for other countries, etc.
 For sustainability and ownership, the following issues must be
discussed at the National Kaizen Council.


Educational reform to teach basic efficiency and discipline at school
and for working population.
 A national kaizen skills certification system should be created.
 Stakeholders (managers, workers, EKI consultants, TVET
instructors, etc.) should be incentivized with financial & otherrewards so they will practice and/or teach kaizen forever.
 Kaizen Month must be continued until kaizen becomes part ofEthiopian culture. Prime Minister’s speeches should be recorded.
 Private kaizen consultants should be fostered.
 Analysis & dissemination of kaizen should be deepened.
4. Industrial Parks
We support Ethiopia’s current policy focus on industrial parks
to receive high quality FDI. Much progress has been made in
the last few years.
 But Ethiopia’s industrial parks are still in an early stage. Greateffort is needed to bring them to global standard.


Quality of infrastructure and support should be professionallyevaluated for Bole Lemi 1 & Hawassa (when completed).
 One-stop service must be built up to global standard; Japanesecriteria should be implemented at Japanese FDI areas.
 Multiple entry options for manufacturing SMEs should be offered(for minimizing initial risk, investing small, and expanding in steps).
 FDI statistics must be improved with international help.
5. Linkage Formation
Matching, linkage, and technology transfer with FDI should bepromoted. This should not be done forcefully by order & penalty
but by providing mutually beneficial incentives & support.
 Thailand offers a good linkage model.


BOI Unit for Industrial Linkage Development (BUILD, 1 director &10 staff) conducts (i) matching for local inputs and JV partners; (ii)hosting subcontracting trade fairs; (iii) component supplier
database; and (iv) subsidizing SMEs to attend overseas trade fairs.
 MOI’s Bureau of Supporting Industry Development (BSID) coaches
private sector for technology, forming industry associations, andintegrating management (shindan), technology & financial access.
 Private NPOs also contribute. Technology Promotion Association(TPA) tries to link Japanese & Thai firms with technology upgrading,
not just matching. Thai-Nichi Institute of Technology (TNI) teaches
Japanese manufacturing spirit, skills, and language.
Board of Investment Unit for Industrial
Linkage Development (BUILD)
Mr. Panuwat, Directorof BSID, speaks
perfect Japanese andhelps Thai SMEs.

Thai-Nichi Institute of Technology (TNI)
teaches Japanese manufacturing; many
graduates work at Japanese FDI firms

JSME Office of Technology Promotion
Association (TPA), a private NPO
linking Thailand & Japan6. Handholding
Handholding is comprehensive support for selected SMEs thatshow willingness and potential. Intensive customized support isprovided for 2-3 years to attain one goal (first-time export,
overseas investment, cluster formation, etc.)
 Handholding requires existence of many industrial experts &programs in management, marketing, technology, finance, etc.
Ethiopia currently does not have sufficient support capacity.
 Pilot HH should be started during GTP2 by combining existing
functions of EIC, EKI, EMI, TIDI, LIDI, etc., possibly with foreign
support. As capacity rises, HH should be scaled up.
 PM Hailemariam suggested HH for transforming Ethiopian
traders into manufacturers who take risks to invest in technology
and equipment.
7. Champion Products and National
Branding
Besides kaizen, JICA also supported export promotion in Phase
2. Entry points were champion products and national branding.
Ethiopia should produce what global customers want, not sellwhat it can produce.
 Professional support is needed to combine and globally project
Ethiopian excellence—Light Manufacturing Vision, arrival of
Flying Geese FDI, National Kaizen Movement, Ethiopian
Highland Leather, Rift Valley Wine, Marathon Winners, AddisAdama Expressway, Grand Renaissance Dam…
 We also recommend the following low-cost improvements:
 Showcasing champion products at Bole International Airport
 All notices & photos should be posted straight & tidy
 House numbers should be given and displayed on streets of
Addis Ababa and other cities
Bangkok

Postings
at public
offices
Mauritius

At International Airports
Addis Ababa’s Bole Airport

Kuala Lumpur

8. General Investment Climate
Ethiopia’s business conditions are poor even by Asian or African
standards. Problems abound in tax & accounting, customs
clearance, foreign exchange control, power, logistics, andbusiness procedure.
 Ethiopia’s place in the World Bank Doing Business Indicator is
low and stagnant (currently 132nd among 189).
 Ethiopia should reform ERCA, improve ESLC, and reduce
foreign exchange hassles. This should be done through strong
top initiative with benchmarking, BPR, kaizen, etc. International
cooperation should be sought as necessary.
