More than two decades of significant investment and policy focus have little to show for aspirations to make Ethiopia into ‘Africa’s manufacturing powerhouse,’ and the sector’s ability to drive structural economic transformation remains a specter.
Development policies emphasizing labor-intensive industries with strong economic linkages, utilizing agricultural inputs, fostering export orientation, import substitution, and rapid technological transfer have hardly enabled the manufacturing sector to meet expectations. The sector has not yet delivered.
Instead, dependence on imported inputs remains high, inter-sectoral connections are weak, and export earnings are meager and shrinking. Lean export earnings and a continued dependence on imported inputs for production have only exacerbated an ever-widening trade deficit.
RELATED POSTS
Manufacturing in Ethiopia has continued to play a marginal role in employment creation, export earnings, share to GDP, and inter-sectoral linkages, and it is still far from being an engine for growth and economic transformation.
A closer look reveals the share of manufacturing in GDP has shrunk, declining from 5.9 percent in 2019 to 4.4 percent in 2022. The government’s target of generating USD 3.6 billion from manufacturing exports in 2019/20 fell drastically short, with only USD 500 million realized in 2021/22.
While manufactured exports remain five percent of total exports, the manufacturing sector also employs less than five percent of the workforce. It only meets 38 percent of domestic demand, and export participation by manufacturers is restricted to a mere five percent of firms, reflecting minimal integration into global markets.
These are features that characterize the Ethiopian manufacturing sector.
Manufacturing dream and the investment not yet paid off
Since the Industrial Revolution, the rise of strong manufacturing sectors has fueled rapid and sustained economic growth, lifted millions out of poverty, and reduced unemployment. Growth in manufacturing spills over to other sectors, creating a self-reinforcing cycle of economic development.
Industrialized states like the UK, US, and Japan are testament to this, as are more recent successes like China and the Asian Tigers – Hong Kong, South Korea, Singapore, and Taiwan.
Ethiopia, inspired by East Asian models, embarked on its own industrialization journey. But visions of manufacturing industrialization have been around in Ethiopia for more than half a century, dating back to the first Five-Year Plan in 1957.
Similarly, the Ethiopian industrial development strategy adopted in 2003 prioritized export-led, labor-intensive industries, infrastructure for rapid growth, and small enterprises for job creation and poverty reduction. Most importantly, with the introduction of the first Growth and Transformation Plan (GTP) in 2010, the government significantly amplified its efforts, dedicating substantial resources and prioritizing the sector’s development.
Ethiopia’s GTP 1 and GTP 2 prioritized boosting the manufacturing industry and its export capacity. According to government development plans and the industry development strategy, promoting export-oriented and import-substitution industries would receive particular focus to drive structural economic change. The plan aimed to increase foreign exchange earnings by supporting these industries, laying the groundwork for faster industrial development.
The Ethiopian government has placed the textile and garment sector at the heart of its industrialization plans, recognizing its historical role as a springboard for development. Textiles have often been the launchpad for industrialization. Most industrialized nations, from England during the Industrial Revolution to the US, Western Europe, and even Asian countries like China, found their initial footing in textile and garment manufacturing. For example, Bangladesh’s clothing sector generates 20% of its GDP and over 80% of its exports.
China’s dominance in this sector, becoming the world’s largest clothing maker since 2010 and producing half the world’s apparel in 2021, is a testament to its power. However, rising labor costs are chipping away at China’s textile advantage, creating opportunities for countries like Ethiopia with abundant and inexpensive workforce.
Despite possessing potential comparative advantages like a young and affordable labor force, and agricultural resources, Ethiopia has struggled to translate these advantages into tangible success.
Ethiopia envisioned export-oriented manufacturing as the driver of its industrialization. The Growth and Transformation Plan II (GTP II) outlined ambitious goals: increasing the manufacturing sector’s share of GDP fourfold, from 4.8 percent in 2014/15 to 18 percent by 2025, and boosting export earnings from manufacturing.
Major investments were poured into infrastructure supporting manufacturing as a result; roads, railways, industrial parks, hydroelectric and irrigation dams, sugar factories, and more were constructed with significant financial resources.
To finance these ambitious projects, Ethiopia borrowed billions of dollars, primarily from China and multilateral financial institutions, which has in turn ballooned its external debt over the past decade soaring from USD 2 billion in 2007 to a staggering USD 28 billion by 2023. On top of this, the country shoulders a domestic debt of USD 35 billion.
However, this colossal investment hasn’t paid off. The hefty loans are maturing, demanding repayment, and Ethiopia’s access to fresh loans is drying up. The country finds itself in a precarious bind.
What went awry?
Ethiopia’s economy has enjoyed rapid growth over the past two decades. This, however, fueled an illusion of Ethiopia being rapidly industrialized and on the path to becoming a manufacturing powerhouse.
Beneath the buzzwords, reality paints a different picture. The bulk of the growth in the industrial sector actually comes from construction, not manufacturing. While construction dominates the industry sector with a 73 percent share, manufacturing lags behind with just 23 percent. This signifies that the construction boom primarily consumes resources rather than generating outputs like foreign exchange earnings or import substitutes.
The government aspires to make Ethiopia Africa’s manufacturing hub, aiming for a 25 percent GDP share by 2025. However, instead of progress, we see decline. This raises a crucial question: why is Ethiopia struggling to translate ambition into reality?
Multiple answers emerge, but one common thread runs through them: poor policy implementation. Selamawit Gebre-Egziabhier (PhD), a university professor and a researcher on manufacturing in Ethiopia points fingers at four main culprits.
She argues implementation failure is at the forefront of the problems. Selamawit observes that Ethiopia poured USD 1.5 billion into 13 resource-intensive industrial parks without proper feasibility studies, neglecting efficient execution, monitoring, and evaluation.
She believes that smaller pilot projects should have tested viability before large-scale rollout.
Abera Kechi (PhD) is the president of the Ethiopian Textile and Apparel Professionals Association and an associate Professor at BahirDar University. He also blames the ineffective implementation of policies for the problems, arguing the government lacks a clear strategy.
Sustainable growth requires strong ties between agriculture, industry, and services, says Selamawit, but weak sectoral linkage has stunted Ethiopia’s manufacturing growth. She notes a neglect of agriculture-based manufacturing, missing the opportunity to create demand for local inputs and save foreign currency.
Ethiopia’s foreign exchange shortage is squeezing its manufacturing sector. Many manufacturers depend heavily on imported inputs and spare parts, requiring vast amounts of foreign currency, adding to the existing forex shortage.
This reliance has resulted in widespread production cuts and even complete halts of operations across the industry. The national shortage of foreign exchange further complicates the situation, creating a vicious cycle that stifles the growth potential of Ethiopian manufacturing.
According to Selamawit, inadequate support given to local firms also contributes to the shortfalls. She asserts the government prioritized foreign direct investment while neglecting to offer sufficient financial and technical support (such as subsidies, tax breaks, and expertise) to local small and medium enterprises. Thus, these firms suffer financial limitations, hindering their ability to compete.
Energy shortages also play a part, says Selamawit. She emphasizes that manufacturing is energy-intensive, and Ethiopia struggles to provide reliable and cheap electricity.
Manufacturers have experienced frequent power outages and voltage fluctuations. Studies indicate that these frequent and lengthy outages cause substantial economic damage to small manufacturing firms and hamper their production capacity. Cement factories, in particular, have been affected by a shortage of electricity, constant outages, surging electric prices, and the limited capacity of power transmission lines and substations.
Another hurdle to Ethiopia’s global competitiveness in manufacturing lies in its challenging geography and logistics. Long land transportation, both from Addis Ababa and regional cities to ports, significantly increases production costs. Adding to the burden is an inefficient transportation and logistical system.
Furthermore, proximity to coasts plays a pivotal role in global manufacturing. Virtually all industrial giants are situated near coastlines, as demonstrated by China’s 1980s industrialization efforts, which focused on establishing special economic zones for manufacturing close to its southern coastline.
Industries located near ports enjoy a clear advantage over those further inland. Water transportation is demonstrably cheaper and easier, as evidenced by the vast price difference in shipping a standard 40-foot container from Addis Ababa to Djibouti (60,000 birr to 90,000 birr) compared to shipping it from Djibouti to any Chinese port (USD 600 to USD 1,200) despite the significantly larger distance.
Recognizing this geographical disadvantage, Selamawit argues that Ethiopia’s industrial parks should have been built (or initially tested through pilot projects) closer to the coast.
Another major problem is the industry’s heavy reliance on imports. Goshu Negash, president of the Ethiopian Textile and Garment Manufacturers Association, points out that most inputs of the textile and garment industry, for instance, apart from labor, electricity, and space, are sourced from abroad. This includes the import of up to 40 percent of the cotton used in garment production.
This dependence on foreign currency, often in short supply, adds another layer of challenge. Expensive logistics and transportation costs add to the burden, squeezing profit margins and hindering competitiveness.
What gaps does the new manufacturing policy address?
The details of the new manufacturing policy lack sufficient depth and clarity, raising concerns about its potential effectiveness. The general outline appears to closely resemble existing GTP initiatives, prompting questions about the policy’s intended gap-filling function and its ability to safeguard the nation’s manufacturing aspirations from mere tokenism and wishful thinking. Will the new manufacturing policy be a concrete blueprint for progress, or just another chapter in the unfulfilled saga of national manufacturing dreams? The question is yet to be addressed.
One of the core pillars of the new manufacturing policy is reducing government involvement in business, aiming for a private-sector-driven industrialization.
Abera, however, expresses strong reservations about this approach. He argues that the textile sector, in particular, requires substantial investment beyond the capacity of most private investors. As a result, he advocates for continued government involvement in textile production. He argues that this government-orchestrated production would then secure a reliable supply of essential inputs for private garment firms, most of which currently lack the capacity to produce textiles themselves.
While acknowledging the complexity of the challenges in Ethiopia’s manufacturing sector, Selamawit offers a roadmap for improvement. First, she calls for stronger state involvement, with efficient policy implementation, stakeholder collaboration, and national stability to build a supportive environment. Second, she advocates for empowering local businesses, offering financial and technical assistance to medium-sized firms and encouraging partnerships with foreign companies.
Third, she proposes nurturing small enterprises through targeted training, financial aid, and managerial expertise, enabling them to grow into medium-sized players. Finally, Selamawit emphasizes the need for stronger sectoral linkages, promoting agriculture-based manufacturing to create a mutually beneficial relationship between sectors and reduce reliance on imported inputs.
