Country Focus: Ethiopia
Ethiopia navigated the global economic crisis in 2008–09 better than many other developing countries, encountering only modest declines in exports, remittances, and foreign investments, which have since recovered beyond their pre-crisis levels.
The Ethiopian government is committed to achieving continued growth within a stable macroeconomic framework, in the context of the new five-year development plan. The strategic pillars for the plan include sustaining rapid economic growth through investment in agriculture and infrastructure, promotion of industrialization, enhancement of social development, and strengthening of governance and the role of youth and women.
Although each country has a unique economy, and several aspects of Ethiopia’s political environment, governance, and institutions make it a special case in Sub-Saharan Africa, sufficient common factors exist to suggest that Ethiopia is a good exemplar for a fairly large group of African countries. Ethiopia is endowed with a large number of natural resources that can provide valuable inputs for light manufacturing industries that serve both domestic and export markets.
Among its abundant resources are a large cattle population whose skins and hides can be processed into leather and its products; forests whose wood can be used in the furniture industry; cotton that can be used in the garments industry; and agricultural land and lakes that can provide inputs for agroprocessing industries. Ethiopia has abundant labor whose low costs offer it a comparative advantage in less-skilled labor-intensive sectors such as light manufacturing. Several negative factors are also common to Ethiopia and other low-wage African countries, such as shortage of industrial land, poor trade logistics, particularly in landlocked countries, and access to finance.
This report does not claim that these Ethiopia-specific findings can be generalized to all Sub-Saharan African countries, although, where commonalities are found across the three study countries, they are discussed in part II of this volume (chapters 2 through 7). But the new analytical approach applied to Ethiopia can be replicated for other African countries to derive specific diagnoses and propose solutions tailored to country circumstances.
Type of Constraint and Size of Firm
|Input Industries||Entrepreneurial Skills||Land||Finance||Trade Logisitics||Worker Skills|
Apparel: Poor Trade Logistics
Given the ready availability of the technology and skills required to manufacture garments, there is obvious potential for domestic firms to increase their share in the domestic and global clothing markets. A significant and growing labor cost advantage, access to a state-of-the-art and well-located container port in Djibouti, and duty-free access to the U.S. and EU markets offer Ethiopia the opportunity to expand its apparel industry. Foreign direct investment can accelerate the process of ramping up production and exports. Ethiopia’s potential for expanding its production of high-quality cotton enhances the potential benefits associated with expanded production of clothing.
The binding constraint on Ethiopia’s competitiveness in apparel has been poor trade logistics, which wipe out its labor cost advantage and cut it off from the higher-value, time-sensitive segments of the market.
Leather Products: Input Shortages
Ethiopia has even greater potential in leather, which is more labor intensive than apparel. Italian shoe importers express the highest regard for Ethiopian leather. Modest, targeted reforms could enable Ethiopia’s large animal herds to produce vast amounts of some of the best leather in the world. Furthermore, the penalty of poor trade logistics is less serious because leather products are less time sensitive than apparel. The immediate constraint is limited access to high-quality processed leather.
Vietnam—with a population similar to that of Ethiopia—created 600,000 productive jobs in the leather products sector by implementing policies similar to those recommended in this report.
Agribusiness: High Input Prices
As exemplified by the success of coffee and cut flowers, the potential for agribusiness lies in low wages, varied soil and climatic conditions, opportunities to increase yields on cultivated land, and large tracts of unused arable land. Ethiopia has the second largest dairy cattle population in Sub-Saharan Africa, behind Sudan and followed by Tanzania. As in other sectors, problems lie in the market for inputs (in agriculture), where distortions lead to low productivity and high prices. Fixed prices for several food items discourage farmers from increasing productivity. Issues in the seed and fertilizer markets also contribute to very low agricultural productivity—yield rates for wheat are generally less than 1 ton per hectare. Investor access to rural land is also difficult because of the confluence of traditional rights with state ownership of land. And neither agricultural land nor cattle can be used as collateral for loans.
Wood and Metal Products: Land and Finance
Firms in the wood and metal products subsectors rely on expensive imports of wood and steel. Ethiopia has the natural resources to develop a competitive supply of wood, but its current supply is unreliable, unsustainable, and poorly organized. Even in the better-managed wood product firms, labor productivity is low—a worker produces 4.5 chairs a day in China and 1.9 in Vietnam, but only 0.3 in Ethiopia. Ethiopia’s steel subsector is also constrained. The price of steel is 30 percent higher in Ethiopia than in China due to poor trade logistics and high import tariffs.
The potential lies not in exports (at least initially) but in the growing domestic market and in the high weight-to-value ratio of finished wood and metal imports.