Chapter 1
When it comes to charting a course for export-led industrialisation, few countries in Africa have been bolder and more focused in recent years than Ethiopia. The origins of this orientation towards industrialisation can be traced to the country’s Agriculture Development-Led Industrialisation (ADLI) strategy, which was developed in the mid-1990s. Its aim was to enable Ethiopia to make initial gains in industrialisation through robust agricultural growth and linkages between the agriculture and industrial sectors. Subsequent five-year plans, such as the Sustainable Development and Poverty Reduction Program (SDPRP) and the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), elaborated the ADLI strategy, and thus laid the groundwork for the strong industrialisation focus of the Growth and Transformation Plans I and II (GTP I and II).
Recognizing the decades-long industrialisation experiences of Western and East Asian countries, and the fact that Ethiopia is a late-late starter:, it is still early days for the country’s most recent industrialisation push. Nonetheless, but it is useful to acknowledge progress and give credit where it is due. As of May 2019, 12 industrial parks have been constructed or are under construction, 6 of which are fully occupied by investors. Of the parks that are operational, all but one are full.[_] By June 2018, total capital invested in industrial parks during the preceding three-year period was approximately $540 million, or $180 million per year—accounting for roughly 5% of annual FDI inflows in recent years.[_] 70,000 jobs had been created across industrial parks by March 2019, with 80 per cent of these positions filled by women.[_] And by the end of the Ethiopian 2018-19 fiscal year (7 July 2019), exports from industrial parks reached $142 million, up by 50% from the previous year and accounting for approximately 5% and 50% of total and manufactured goods exports, respectively.[_] Notwithstanding this notable progress in just a few years, important barriers remain that must be resolved in order for these industrial parks to avoid becoming a burden on public budgets and for the hoped-for jobs and exports to fully materialise.
Ethiopia’s industrialisation efforts have by now received substantial coverage, but not much has been described about how the country’s government has worked on this agenda and what it teaches us about “getting things done”. Since Ethiopia’s industrialisation agenda took centre stage in the mid-2010s, the Tony Blair Institute (TBI) has had the opportunity to work closely with the Government of Ethiopia (GoE). We have embedded a dozen or more staff at a time in the Ethiopian Investment Commission (EIC) and the Industrial Parks Development Corporation (IPDC), and provided advisory support to other institutions, including the Prime Minister’s Office (PMO), to support them to develop, coordinate and implement policy related to industrialisation. This experience has been hugely instructive for us, especially on the “how” question. It has underscored the critical importance of governance in enabling (or sometimes hindering) governments to make tangible progress toward their big economic visions. Drawing from the experience of TBI’s team in Ethiopia, we view three aspects of governance as being particularly important for the Ethiopian government’s industrialisation efforts thus far:
Sector and policy prioritisation
Coordination, both across government and between government and other actors
Capabilities to implement policy
This case study reflects on TBI’s experience working with GoE on its industrialisation efforts since 2014. While much of TBI’s work in Ethiopia during this period was on GoE’s industrialisation agenda, we cannot claim to provide a definitive, all-encompassing account of the country’s experience in pursuing this agenda. Rather, our intention is to discuss why we believe the aforementioned dimensions of governance are important, describe specific examples from our experience in Ethiopia, and offer learnings based on the country’s efforts thus far to become a manufacturing hub in Africa.
Chapter 2
Every country faces fundamental questions when it comes to promoting economic growth, namely:
whether it should focus on particular sectors of the economy, or carry out a policy that aims to improve the enabling environment for all sectors instead
which sectors it should aim to strengthen (if the country wants to pursue a sector-specific approach)
which value chain segments and constraints are most important in the focus sectors and which policy instruments will be most effective in resolving them.
On the first issue, trying to strengthen the enabling environment for all economic activities is appealing, because it appears to relieve government from the task of figuring out which economic sectors hold the most potential—a task that many fear government is not equipped to handle and that opens the door to harmful rent-seeking. Yet our view is that any policy measure that government pursues will almost certainly have differential effects across sectors, and at the same time, the constraints to growth are so specific and varied across different sectors that economy-wide measures may not address the most critical challenges in the highest-potential sectors. Moreover, many governments have not yet built up their capabilities to deliver complex reforms that require effective coordination and implementation by various government agencies—which is what many enabling-environment reforms call for.[_]
GoE recognised the value of sector prioritisation both on paper and in practice—dating all the way back to the ADLI strategy and continuing until today. The most recent guiding document for GoE’s economic vision, the Growth and Transformation Plan II (GTP II), recognises that agriculture will continue to be a major contributor to the country’s economy in the coming years, but that:
the development of the manufacturing industry or industrialisation has now become indispensable in the renaissance drive of the country. In the upcoming years, the growth of manufacturing industry is critical in order to ensure sustainability of the current economic growth and to realize the vision of becoming a lower middle income country by 2025. Rapid economic structural transformation is crucial to achieve the country’s vision within the set time frame.[_]
Not only does the GTP II put a particular emphasis on manufacturing, but it takes a further step by prioritising “manufacturing industries that are labour intensive and use agricultural products as inputs so that they can significantly contribute to job creation and strengthen the agriculture-industry and the rural-urban linkages”.[_] Some of these manufacturing industries, such as leather and agro-processing, were initially identified in the ADLI strategy, and continued as priorities over time.
Over the past few years, we have seen key GoE leaders—in the PMO, EIC, IPDC and elsewhere—act assertively based on this targeted approach. They have actively followed up and ensured relevant sectoral institutions are engaged so each of the industrial parks is tailored to the needs of particular manufacturing sectors. They have held regular meetings to gauge progress on park construction, and attended to the details of specific infrastructure requirements for different sectors. They have regularly travelled to Asia, and worked with East Asian governments to learn from their experience with SEZs and to garner financial and technical support (particularly but not exclusively from China). They have personally intervened when obstacles or delays cropped up in the construction process. With this guidance, the IPDC leadership has overseen the design and construction of the industrial parks, so that they are equipped with the necessary sector-specific infrastructure for investors to be able to “plug and play”.
The result? Hawassa Industrial Park, the flagship park, was constructed in less than a year, and many others have been developed in the subsequent few years. Sector specialisation across the parks is clear: Hawassa Industrial Park and others focusing on textiles and apparel include pre-built factory sheds as part of their physical infrastructure, whereas Kilinto Industrial Park—which specialises in pharmaceutical manufacturing, a sector in which each factory has unique requirements—does not.
Sector-specific industrial parks, in turn, have enabled EIC to craft a more attractive investment proposition, and with this in hand, they have been more ambitious in approaching large global players in priority sectors. The composition of Ethiopia’s high-level delegations (including ministers and other institution leads) at globally recognised textiles and apparel industry events, such as Prime Source Forum in Hong Kong and MAGIC in Las Vegas, is a testament to this. Sector prioritisation has also created the bandwidth for these officials to “seal the deal” with a number of investors. They have often set aside time to meet particularly important, large investors operating in priority sectors, to personally persuade them to invest and to hear out their concerns once they have established operations in the country. This high-level commitment and attention is a major reason why Phillips Van Heusen (PVH), one of the world’s largest apparel companies, entered Ethiopia as an anchor investor in Hawassa Industrial Park and pulled manufacturers in its supply chain with it. PVH’s role as a pioneer in Ethiopia’s textiles and apparel sector has generated positive spillover effects, by attracting other large textiles and apparel firms to the country (including their own suppliers). If GoE had not identified priority manufacturing sectors where it would focus its investment promotion efforts, it may have been spread too thin to be able to provide this personalised attention from top political leadership. This strategy, of course, becomes less feasible as the economy grows and diversifies, but focus from key decision-makers in GoE was essential for the country to get the industrialisation ball rolling.
Building on progress made under the GTP II, Ethiopia has recently initiated a “homegrown economic reform agenda”, which situates the existing sector prioritisation in a deeper reform effort. This three-year programme aims to alleviate foreign exchange constraints, boost the export capacity of the country (particularly in merchandise exports), create quality jobs in productive sectors and broaden the role of the private sector in the economy, including through privatisation of state-owned enterprises.
Just as important as prioritising sectors for development and investment is identifying which value chain segments to target and which problems in these sectors to try to solve—the third fundamental question posed at the beginning of this section. The same principle applies: government must start somewhere when it comes to strengthening a particular economic sector, and it cannot do everything at once, as key resources are limited in many developing economies. We mentioned that Ethiopia’s senior leaders have been hands on in surfacing investors’ concerns and have driven EIC and IPDC to come up with ideas to resolve them.[_] Yet this sort of problem-solving has typically been ad hoc, rather than based upon a structured process for collaborating with investors. And it has often resembled firefighting, with senior PMO officials stepping in after investors have failed to get their issues resolved through other avenues. For example, unreliable access to electricity and water and inadequate housing for workers have presented challenges for investors in various industrial parks, but could have been anticipated and planned for earlier on. GoE is in the process of resolving these constraints, by agreeing to $1.6 billion in investment from the Chinese government to provide electricity to 16 industrial parks and by working through financing options to address the housing challenge.
The progress that GoE has made on key problems in priority manufacturing sectors should not be underestimated; at the same time, this sort of ad hoc approach to problem-solving may have to be structured more deliberately going forward. In many cases, multiple actions may need to be taken at the same time in order for a challenge to be resolved, which calls for its own sort of prioritisation and planning ahead of time.
For instance, in its industrialisation agenda, GoE has up until now put the bulk of its attention on the production of final products, such as garments and apparel. While this is important, focusing on downstream segments of the value chain in the short run meant that they paid inadequate attention to the local production of intermediate inputs, such as textiles (i.e. upstream segments of the value chain). The fact that there are far more garment manufacturers in the industrial parks than textiles manufacturers is illustrative. The same point applies in the leather sector: Ethiopia has abundant livestock resources, but export abattoirs are operating at less than 40% of their capacity because of the underdeveloped and complicated local livestock trading system. Consequently, factories producing leather goods rely on imports of hides and skins due to the low quality of local supply. More focus on agricultural transformation in the country—especially in agricultural sectors that can produce inputs for manufacturing activities—would be an important corrective, so as to balance efforts to jumpstart garment and apparel manufacturing (downstream) with support to improve productivity in cotton (upstream) and thus create an environment in which domestic linkages could form. These linkages between upstream and downstream activities can set a sector like garments and apparel on a path to sustained exports, which GoE did not fully appreciate. It has now recognised this shortcoming, and is trying to facilitate these linkages—an area where we continue to support GoE in identifying bottlenecks and potential fixes.
Similarly, GoE had been narrowly focused on hard infrastructure projects, such as industrial parks and the electric railway to the Djibouti port. These are, of course, critical, but the problem of import and export costs cannot be solved through hard infrastructure alone; tackling “soft” infrastructure issues, such as administrative burdens in the logistics system, is equally critical and could achieve “quick wins” for the government. Again, GoE’s delayed action on this front has already imposed large costs on exporters and counteracted some of the cost advantages that Ethiopia has through low labour costs and preferential trade agreements like the African Growth and Opportunity Act (AGOA). GoE’s current reform efforts seek to address some of these aspects of the country’s inefficient logistics system.
Chapter 3
In recent years, there has been a growing chorus of voices highlighting the vital role that coordination plays in enabling countries to promote economic transformation.[_]A core tenet of the modern approach to industrial policy is regular coordination between the government and the private sector, so that the latter can share their challenges with the former and the former can devise and get feedback on solutions to these challenges. In turn, any given challenge in a sector—whether access to inputs, provision of appropriate infrastructure or availability of skilled workers—will touch on the mandates of multiple government agencies. As a result, resolving the challenge requires various parts of government to coordinate effectively. Intra-government coordination is vital not only for engaging with and resolving the constraints of the private sector, but also for putting forth a coherent message to the public in order to calibrate their expectations about the government’s plans for economic transformation and progress against those plans.
Throughout the years, GoE has implemented various initiatives aimed at improving coordination, to deal with cross-cutting issues such as export, job creation and sector strategy/policy development. These include inter-ministerial task forces, committees that are chaired and coordinated by the PMO, and stakeholder consultative workshops. In our work with GoE, we have found that how well the government has been able to coordinate within itself and with other actors has heavily influenced its progress towards achieving the country’s economic vision.
One example where cross-government coordination was critical was in the development of a strategy to grow Ethiopia’s pharmaceutical manufacturing sector, which TBI worked on extensively alongside EIC. EIC led the development of this sector strategy, which entailed repeated consultations—initially bilateral, then in a larger group—with other government agencies, such as the Ministry of Trade and Industry, the Ethiopian Food and Drug Administration and the Ministry of Health;[_] existing pharmaceutical manufacturers operating in Ethiopia; and foreign pharmaceutical manufacturers that may be interested in investing in Ethiopia. The PMO’s backing of this process enabled EIC to elicit ongoing cooperation from all these different agencies, and this broad engagement, in turn, was essential to get to the heart of what is holding the sector back. It also made many parts of government feel like they have a stake in the sector’s development and signalled to potential investors that GoE is serious about growing the sector. Importantly, the coordination process was iterative: over time, different parts of government were brought into the fold, and in some cases, different officials from already-participating agencies were included. Although time-consuming, ongoing coordination was important because it was not always clear at the outset who should be in the room to discuss or resolve a particular issue. By the time the pharmaceutical manufacturing strategy was approved by the Ethiopian Investment Board, most of those involved—including firms operating in the sector—expressed satisfaction with the inclusiveness of the process. So much so, in fact, that EIC explicitly used it as a model for the development of other sector strategies.
Another example is how the PMO has used GoE’s export coordinating committee (initially established in the 1990s and taking different forms since then) as a platform where government institutions could collectively intervene to improve the performance of the country’s key export sectors. Our team supported the previous iteration of the committee between 2017 and mid-2018, by establishing coordination mechanisms, conducting detailed analyses to support problem-solving, and developing tracking and monitoring tools. The committee, previously chaired by former Prime Minister Hailemariam Desalegn and his senior advisors, has been revived under Prime Minister Abiy Ahmed, and our team has recently begun to support it again.
We have witnessed its effectiveness in bringing government institutions together on a monthly basis to closely follow the export performance of the country; discuss challenges within the export sector and how to address them; and monitor the progress of ongoing interventions. The committee consists of Ministers and State Ministers from relevant departments (Ministry of Agriculture, Ministry of Industry and Ministry of Mining) and supportive agencies that work on utilities, logistics, customs and the like.
Crucially, the committee has also provided structured opportunities for key private-sector players to discuss their challenges with government counterparts, which has enabled GoE to successfully unblock critical constraints in priority export sectors. The coffee sector reform that was enacted in the beginning of 2018 and is now being implemented is an example. Initiated to address the main challenges of the coffee sector, the reform was developed through effective coordination between government and private sector bodies with the aims of better integrating the value chain (including ensuring traceability); improving service provision by the commodity exchange; and strengthening R&D to generate higher productivity in the sector. With strong leadership commitment, consistently frequent meetings and close follow-up on implementation, the committee under the new GoE administration has started focusing on key challenges—such as productivity, appropriate incentive mechanisms and contraband trade—not only in coffee but in other export sectors as well.
Despite these positive steps, we have also seen some shortcomings of the export coordinating committee, often related to weak institutionalisation and accountability mechanisms. Because the committee has not been empowered with a clear legal mandate, its structure and the delineation of roles has fluctuated over time. In addition, it has not established any sort of system to hold senior GoE officials in the committee accountable for export underperformance. Consequently, even though the committee has been operational for over 15 years, it has struggled to sustainably ensure effective coordination across government agencies.
This challenge also plagues several of the coordination committees that have been set up to address cross-cutting issues in recent times. These committees are led by different senior officials within GoE who have widely varying levels of commitment to their objectives. The allure of setting up a coordination committee as a quick fix at times sidelines the more important task of equipping these committees with the authority, mandate and resources that they need to advance on critical challenges. As it stands, many committees may serve as short-term stopgaps but are unlikely to sustainably bridge the coordination gap across GoE institutions.
Furthermore, some weaknesses in coordination have contributed to GoE’s broader challenge with respect to public communications about its industrialisation agenda. Government messages about this agenda were focused almost exclusively on FDI promotion, and thus neglected the role of and opportunities available to domestic firms in the industrialisation process. This exposed the government’s ambitious industrial parks strategy to criticism among domestic constituencies, who were dissatisfied with the attention that GoE paid to foreign investors at the expense of facilitating linkages and technology/knowledge transfer to domestic firms.[_] Deliberate coordination with the domestic private sector may have helped GoE to more effectively manage resistance to its industrialisation agenda, which has been and will continue to be essential to pursue such a grand vision. In fact, in line with the homegrown economic agenda that the new administration has put forth, key government agencies like EIC and the Ministry of Trade and Industry have been tapped to take the lead in supporting the domestic private sector. GoE has already taken initial actions in this regard—for example, by issuing guidance to the banking sector to increase lending to domestic firms. In September and October 2019, approximately 83% of lending was directed to the private sector, a 50% increase over the same period in 2018.
Chapter 4
Time and again, we have seen an analysis or a report being carried out by an external consultant that ends up sitting on a shelf or in a filing cabinet. We have seen well-written, thorough policies that on paper are in effect but that do not have much bearing on how the government, businesses or ordinary citizens operate in practice. Ultimately, a policy is only as good as it is implemented. Context matters a great deal in the success of a given policy; similar policies to promote economic growth that have been tried in different countries, such as Special Economic Zones (SEZs), have inevitably achieved varying degrees of success.[_] To a large extent, the ability of government to get things done and to learn over time how to do ever more difficult things matters more to success in economic transformation than devising the ideal policy frameworks and regulations.
The implementation capability of different GoE agencies varies widely, which has had tremendous influence on how responsibilities and policies related to the industrialisation agenda have been executed. For example, soon after launching the industrialisation agenda, the Ethiopian Investment Board recognised precisely this fact—that different parts of government had differing abilities to accomplish concrete tasks related to investment, and that GoE as a whole did not have the track record to be able to move at the pace that is required to serve strategic investors. In response, EIC and IPDC would be moulded as “pockets of effectiveness” within GoE. They would have strong links to the PMO and could expedite the construction of industrial parks and lead the drive for investment, respectively. They installed new leadership in EIC, many of whom brought technical knowledge and experience from outside government; political savvy and problem-solving skills; and a strong motivation to contribute to the country’s bold economic vision. They authorised (even urged) both agencies to pursue their tasks aggressively, while also tracking and holding them accountable for progress. And they stepped into the fray alongside EIC and IPDC to make key decisions and to resolve obstacles as they arose. Many meetings at the PMO in recent years entailed EIC or IPDC taking the lead in reporting on a particular issue (with other relevant ministries and agencies also present), and PMO officials prompting open discussion about progress and challenges, and offering guidance and making phone calls during the meeting itself to address the challenges immediately. This approach kept many investment projects and initiatives moving simultaneously, through the combination of the PMO’s clout and the fact that they had shaped two relatively capable agencies, EIC and IPDC, that they could trust to drive execution.
There have, though, been cases in which the PMO did not pay enough attention to the implementation capabilities of different ministries. As we described previously, the export coordinating committee was revived, and it was tasked with identifying barriers to increasing exports in priority sectors. In devising potential solutions to these barriers, however, the committee did not sufficiently account for ministries’ limited resources, skills and systems—all essential for implementation. In other words, the proposed solutions to export challenges were not crafted in a way that they could be effectively implemented by the government, thereby diminishing the value of the committee’s efforts to identify export challenges in the first place. These weaknesses in implementation capability across GoE have held back progress not only on export promotion, but also on economic transformation and the employment and productivity gains that it can bring.
Chapter 5
Our experience supporting GoE on the “how” of furthering the country’s industrialisation process has taught us much about the importance of government’s ability to conceive of, pursue and learn from action. The PMO, EIC and IPDC have been the main protagonists in this process thus far.
We can see the critical roles that they have played: establishing and adhering to a sharp focus on promising sectors and the barriers to attracting investment in those sectors; actively coordinating both strategy and action with various parts of government and the private sector; and driving implementation by getting things done themselves and by spurring on other ministries and agencies to be responsive. As we have discussed, the process has not been without its mistakes and unanticipated challenges. There remains much to do before GoE’s industrial park-based economic strategy will reach its full potential. Indeed, since the appointment of Prime Minister Abiy Ahmed in April 2018, there has been a renewed emphasis on policy reforms that promote a shift from state-led to private sector-driven growth and economic transformation. Industrialisation sits at the heart of this homegrown economic reform agenda, the privatisation programme and the ten-year plan propelling the new vision. As always, for these objectives to be achieved, GoE’s ability to prioritise, to achieve productive coordination and to implement effectively will be instrumental.
Yet we should not lose sight of how much progress has been made—from a bold economic vision on paper to a series of fully constructed industrial parks accommodating foreign investors from around the world, in a mere five years. Just as it has been in these past 5 years, the ability of GoE to implement, learn from, and adapt its industrialisation policies will determine how the country fares in its quest for economic transformation in the coming five years and beyond.