Manufacturing: dream and reality

ArkebeOqubay (PhD) is special advisor to the Prime Minister with a ministerial portfolio. Arkebe is one of the high-level government officials in the EPRDF’s government for the past two decades and has served his party the Tigray Peoples’ Liberation Front (TPLF), since the days of military struggle. In Addis Ababa Arkebe is a household name having served as the mayor of the city for one five-year term. Nicknamed “Arkebe’s Shops”, the container shops that he introduces to the capital are relics of his mayorship in Addis Ababa. Later, he also held state minister position at the Ministry of Work and Urban Development where he was largely focused on urban management and infrastructure development. In the ninth Congress of TPLF which was held months after the departure of the late Prime Minister, Arkebe, together with other veterans announced their decision to step down from their position in the central committee of the party and their intention to continue only as members of the general assembly of the party. In that time, Arkebe also went on to complete his doctoral studies in development economics and publish his dissertation into a book entitled “Made in Africa: Industrial Policy in Ethiopia”. In his book Arkebe argued how the role of an activist state and a well-designed industrial policy can play a critical role in kick-starting industrialization in a poor, under-developed nation like Ethiopia. In general, the book discussed the case of four sectors—Floriculture, Cement and Leather—to review industrial policy application in Ethiopia and its success and failure stories. Still well entrenched in the policymaking circle, Arkebe was also highly involved in the recently ratified second Growth and Transformation Plan (GTPII) where his government is expecting to witness miracles in its development experiment. The plan is all about structural transformation and seeing the emergence of the country’s manufacturing base and alleviating the longstanding forex problem. Also tasked with closely following industrial park development in Ethiopia, Arkebe has a thing or two to say about what GTP II would entail in terms of manufacturing growth and the growth path beyond. Asrat Seyoum of The Reporter sat down with Arkebe to discuss the country’s manufacturing ambition. Excerpts:

The Reporter: You are frequently quoted as saying that the Ethiopian economy is at its “take-off” stage. What exactly does take-off period mean in economic terms and how long would the economy stay in this status?

Arkebe Oqubay: In general, what we refer to as economy take-off for Ethiopia is the process of stopping the persistent economic decline which was evident when the Derg was in power and signaling a new era of economy recovery. As you know, in the wake of the fall of Derg the main focus was to rehabilitate the war-torn economy that is Ethiopia. After that, the focus shifted towards bringing about economic growth by focusing mainly on agriculture and rural development. As a result of that, we have managed to sustain a double-digit economic growth in the past 12 years. Nevertheless, bringing about a structural transformation is not limited to insuring a double-digit growth. One fact is that we have started from a low base and to bring about sustainable transformation we need a different set of policies and strategies now.

But there are some who argue that this take-off period has been extended too long. What do you say to this? What does the experience dictate in this regard?

The simple fact is the level of economic growth that the country is in right now: it is still in a lowincome category. We say an economy has grown when it is able to graduate to a middle-or high-income level. So when we speak of take-off we are actually referring to the fact that it has reversed its declining trend. If we look at it now, Ethiopian agriculture is showing great dynamism while the manufacturing sector is still highly underdeveloped. It still contributes less than 5 percent to the national production. Based on manufacturing, we can’t really say that Ethiopia’s economy is at the desired level yet. So, it is all about the frame of reference.

One thing that is clear now is that the services sector has dominated both agriculture and manufacturing in its contribution to the national economy. But the traditionalist view of growth has it that in agrarian economy the growth in the agriculture and the surplus from this growht would drive the growth in manufacturing sector. You government also subscribes to this view. With this in mind and with the active resource allocation role that a developmental state wants to play, don’t you believe that it has gotten out of your hand there?

If you examine the growth of the services sector in Ethiopia it is a healthy outcome of fast economic growth. The growth narrative of most developed countries shows that the growth of agriculture would feed into the sprout of the manufacturing sector and then the emergence of the service sector. In this case, the kind of services we are talking about are those complementary with manufacturing. For example, if you consider a sector like IT they are complementary with manufacturing. However, if you see the growth trend in most Africa countries, including our own, the services boom we have experienced is not related or complemented to manufacturing; in most of these economies it also features the emergence of the informal sector. In Ethiopia, the services sector had had a broad base for about 15 years now; but it can never be taken to be a healthy outcome of a fast economic growth. This is what the question of economic transformation entails for an agrarian nation. You see, for an agriculture-led economy even when there are no policy efforts to transform the economy into manufacturing-based one the surplus from agriculture would push the services sector. This is why a concerted effort is need to develop your manufacturing sector. To demonstrate with practical example, Nigeria is a middle-income country with PCI of USD 3000 and plus. Nevertheless, owing to its extractive industries, mainly oil, some 55 percent of Nigeria’s one is composed of services; and its manufacturing is still at its lowest base. On the other hand, take another middle-income country: Vietnam. It has a PCI of a little over USD 2000, but has a strong manufacturing base. So, the growth of the manufacturing sector is fundamental to bringing about structural transformation. And, that is why we are striving to take the manufacturing sector off the ground.

In this regard, can’t it be argued that the focus on manufacturing is a little belated?

Not necessarily. You see, economic growth cannot be driven through wishful thinking . One has to start with the objective conditions on the ground. We had to start with agriculture since that is what we had. We need the growth of agriculture to feed the people , to generate forex to finance our capital and consumer goods demand. Even if we want to see manufacturing growing in those early days, we did not have the resources to do so; first the agriculture showed growth and create resources to support our manufacturing ambitions.

Apart from that, now, your government is trying to take corrective action by redirecting resources from the booming services sector. The way it is going about it is by campaign and trying to sway investors in services to come to manufacturing sector, where the underlying incentive structure still favors the former. Is that a sustainable approach?

Basically, there are ways that the government can use to influence the behavior of the private sector. It either uses various incentives and benefits to lure members of the private sector to a specific sector or it can also trim the profit level that can be generated in certain undesirable sectors. The various campaign and awareness-raising forums would be useful to educate the private sector as to the direction of the government and what the various sectors could offer in terms of opportunities. These forums would help investors make an informed investment decision. However, this is not how one builds an industry. An industry is built around a specific, selected sector by putting in place a strong legal, incentive and support frameworks and by taking measures to relieve sector specific bottlenecks. Apart from helping them to go into manufacturing, there is also a need to support these companies become profitable since their track record would either encourage or deter others looking towards investing. And this is what the government is trying to do.

It is one thing to put in place an incentive structure and lure investors. But, it is another thing to actually win over those invested in services. In this regard, do you prepare the ground as an incentive structure is that adequate to win over those in services sector?

I would not say that.  Because, on the ground if it is still more profitable to be involved in the services sector than the manufacturing sector, we can really say that we have managed to adjust the playing field. When we speak of incentives it is only about tax holidays or duty-free privileges. For instance, investors need finance, land, buildings and structures, infrastructure (electricity, telecommunication and water); they also do not want to face logistical hurdles to export their produce. These days, when one considers the manufacturing business, it is about being able to overcome the stiff global competition both in price and quantity. If they were able to meet customers’ demand in delivery, it would not work. So, these bottlenecks have to be addressed. In this regard, we can’t say that what we have done is adequate. In some sectors like cement, we can see that things have been better and market conditions have also been favorable. What we are trying to do in GTP II is to address these problems by developing industrial parks. This approach will be instrumental to alleviate these bottlenecks by offering centralized services delivery in the parks. Still we can’t alleviate all the bottlenecks in the manufacturing sector but the industrial park approach would definitely relieve some the basic ones.

Talking about bottlenecks, in GTP I we have seen that a number of bottlenecks in government prioritized sectors like leather and textile exist. Fundamentally, complications in relation to the raw material supply chain have proved to be a big problem. What do you plan to do about it?

If you look at the leather sector, what needs to happen in the long-run is to bring about change in the livestock production of the country. As you know, raw leather is a byproduct of livestock production; the primary production is the meat. So, we need to nurture health and quality supply of raw leather to our tanneries. But, in the short run, there is also the option of importing the raw leather and processing it in the country. Importation of raw materials and processing it locally by itself is a big step forward for our manufacturing sector. Nevertheless, since Ethiopia has the largest livestock population in the continent, we need to find the source of the bottleneck in the supply and take corrective measures. Here one solution could be encouraging livestock rearing in a more modern way through ranches and this is one of the approaches that GTP II plans to follow. In general, our solution in GTP II will definitely be sector specific and more focused on alleviating these bottlenecks.

Taken from the East Asian development experience, institutional innovation has been a big part of the government’s industrialization drive in Ethiopia. Especially, the so-called sector specific “institutes” have been operational for many years now. But, commentators downsize the contribution of these institutions in supporting growth in their respective sectors. What is your take on this?

I do say that they have played their role. But, I can’t argue that the role they have played is sufficient to see their respective sector prosper. For instance, we can see the institutes in horticulture, leather, textile and the like playing their role in relieving bottlenecks. At least, the existence of these institutes has provided a platform where investors in the respective sector can voice their concerns and difficulties. Some of them also offer training and capacity building supports to their sectors. If you ask me, the basic problem around these institutions is the gap in leading the knowledge and technology transfer. For this, limitation in trained manpower has played a greater role. What we need to do is to establish strong relationships with similar organizations abroad and try to learn from them. Basically, what is needed of these institutes is a two-pronged support. On the one hand, those FDI companies need the institutes more to help them in removing bottlenecks in local market. Meanwhile, when we think of Ethiopian investors the capacity building and knowledge transfer role of the institutes is very significant. The institutes could help in recruiting frontrunner FDI companies to come to the sector so that the local manufacturers could learn from these companies over time.

Apart from these innovative and new institutions, the government has also been engaged in the constant restructuring of the existing institutions. In fact, this has been done so frequently that commentators express fears of loss of institutional memory and culture which could be useful for a nation. What are the considerations here?

When we talk about institutional building, it has to be clear that nations, which are striving towards structural transformation, do not always start with a fully developed institutional set-up. In fact, institutions emerge as nations grow and transform over time. Now, if we take the whole bureaucracy, it would be very tough to change it in the space of a few years; but we pinpoint which institutions are critical in terms of ushering in both local and FDI companies in the manufacturing sector and take action there. For instance, we can take the customs and tax offices, the investment office and Industrial Park Development Corporation as critical to attract and sustain investment in the manufacturing sector.So, we have to try to build their capacity not only by training the personnel but also by forming links with foreign institutions and making use of foreign experts. Most importantly, these institutions have to improve the services they give based on the feedback that is obtained from investors in the  manufacturing sector. That being the case, maintaining the institutional memory is always one consideration to which high value is attached.

Your government looks to have chosen the industrial or export zone approach to develop its manufacturing base. Why the exclusive focus on this approach? Is it to attract FDI or does it have its own merit?

It is simple. All we have to do is ask the question what we need to do to bring about fast economic growth. If we are to progress in manufacturing we have to attract some of the best manufacturers in the world; everybody can’t be a beginner. If we say we are beginners when it comes to manufacturing, we have to attract the best FDI in the world and learn from them. We should not have the wrong perception about FDI. Each country wants to attract the best FDI; even the advanced economies. Basically, there are three things we need from FDI: market access, skill and technology and best management practices. We need to sample the best experience in these three areas. So, what do these best FDI companies need to come and invest here? The first thing is they need to go into actual production process immediately; the yare not going to wait for three and four years. This is also to our advantage. The faster they go into operation, the faster they would start exporting their goods and increase our forex earning. Plus, we also need to generate employment quickly close to 200,000. On top of that,when they go into operation, it will also create the opportunity for the local input sector to flourish. The parks would help these companies to go into operation in a month’s time. For example, one Korean firm in Bole-Lemi Park was able to start exporting within three months and employ 1000 people. Also, from the environmental point of view, it is better to concentrate the manufacturing firms inside parks so that their waste can be managed easily. Even from the local manufacturers’ point of view, parks are quite important in cutting establishment cost and go into operation quickly. The other merit of having industrial parks is the need to have a high-level of coordination between manufacturing firms. Different from agriculture, manufacturing need many supports and it is cost-effective to offer these supports in a more condensed manner. The basic merit is in the speed of development that we aspire to have. If you look into the advanced economies, they have achieved growth in manufacturing over 100 years so they needed no industrial parks. But, most recent experience in Asian development dictates that the industrial park approach is better fit for economies that want to achieve fast manufacturing growth. But, one thing that has to be clear is that an industrial park is not about building factory sheds only. It is the development of full institutions in which infrastructure should be provided at higher quality. On top of that, there are international standards that had to be met. After the Singapore Fire and 9/11 incidents, there are increasingly more pressing international standards that these factories need to adhere to. Furthermore, we are planning to have more specialized parks where specific sectors would be concentrated in. One thing that has to be clear, however, is that these parks are not meant for FDI companies only. From the very inception, our park design also takes into consideration local manufacturing firms as well.

True to form, the development of the parks these days is becoming just as important as the merit of the parks in Ethiopia. This is especially true with regard to the involvement of the local contractors in the development of the parks. What is the general direction in terms of the development of industrial parks?

The first thing we did with regard to the industrial park development is to undertake a study sampling experiences of Asian nations like South Korea, Vietnam, Singapore and China; from Africa we have also sampled the experience of Mauritius and Nigeria. The industrial park alone does not do miracles; it is a complete set of industry policy and strategy that is instrumental for progress. If you look at some Africa countries like Senegal and Liberia, there park experience dates back to the 1970s. But we can’t say that they have succeeded in building a manufacturing base. So, we have planned to develop industry parks in four towns: Hawassa, Dire Dawa, Adama and Kombolcha. After five years, we have managed to build only the Bole-LemiPark in Addis Ababa which is currently entering its sixth year. But we have not yet fully completed it. This park created 5,000 jobs but took five years; at this rate we will not be able to build our manufacturing base in the next 100 years. So, what we have decided to do is that we need to have a clear direction regarding the development and aim of industrial parks. Hence, we say that we need to have specialized parks, our parks should also be eco-parks and that we need to have all the legal and policy framework in place. So, we have discussed this study and decided that this should be the way to go. For instance, you can’t develop industrial parks without the proper legal framework; hence the parliament ratified the proclamation to govern industrial parks last March. Apart from that, the development of parks also needs a strong institutional guidance in the form of the corporation, which we have established. Furthermore, the development of parks also needs finance. We can’t rely on the treasury to develop a handful of fully functional parks. Hence we went a head and accessed funds from the international bond market. The basic point here is whether we can proceed with our previous pace of developing the parks. Can we afford that? So, we had a task of building parks faster and at a certain quality standards. Given these challenges, we can’t build many parks at once; hence we decided to start with a model park that is Hawassa Park (employment opportunity for 50,000 and export earning capacity of USD 1 billion). We are trying to complete the construction of Hawassa Park within six to nine months. So, one thing that we have to note is that there is no park in Ethiopia so far; not in the full sense of the word (Industrial Park). We have to admit that we don’t have strong local capacity in designing and constructing industrial parks. So, what is a fact is that we don’t have local constructors who are at the level where they can do that. The Government of Ethiopia has a well-proven track record in supporting and nurturing local construction industry actors. Especially, in the massive low-cost house projects the government has opened up a wide range of opportunities to local contractors. This includes support at a considerable cost for the government because most of these firms were beginners and have to exercise and build their capacity even at the expense of quality and delivery time. One thing that has to be clear is that the government is building these parks for companies and there is a contract that it needs to uphold if these companies are to come and work here. They have to come and work, if we are to pay our debt in time. So, we can’t afford to let our local companies take this chance and learn from it. That is why we have decided to give priority to those contractors who have the experience in developing an industrial park. We don’t have time for affirmative action; not in the first phase of the park development at least. The usual contract execution method is also something we had to look into deeply. If we  follow the traditional procedure, we need at least five and six months before we select the contractor, award the contract, pay the advance and so on. That is the kind of time we don’t have. With this in mind, we have said that we require a contactor that does not wait for an advance payment to start the construction process. We also require a contractor that can access its own source of foreign currency since accessing forex can also be another factor that will test the development process; and, of course the capacity to design and construct parks is also another requirement. Now, when we say this, it is not only about being a foreign firm, it has to be a company with prior experience in development. In this view, of what does the experience in Bole-Lemi Park suggests? The government with a view of nurturing the local construction sector has involved some 23 contractors in the project. But, the outcome is not desirable and is highly unaffordable. So, the government is taking very careful and cautious steps towards industrial park development. Believe me, we will have a second and a third phase in the development of parks, if we succeed in the first phase. Then, we will have the opportunity to involve local contractors since by then they will learn a great deal and will be ready to construct parks properly. So, we need to think critically as to which sectors need urgency and which don’t. For instance, the recently completed Me’eson-Djibouti electric rail project was completed within three and a half years. That is some project we needed to show urgency on since it directly affects our export-import sector. Far as capacity building is concerned, I think the government needs a reminder on the subject since I was personally involved in many capacity building activities with local contractors.

With regard to the construction of parks, the recently canceled bid for the Dire Dawa Industrial Park has sparked quite a controversy among local contractor companies. Can you explain why the bid was canceled? Is it a covert measure to exclude local contractors from the process as it is claimed? If so, why invite them to get involved in the first place?

I think the claim that suggest a systematic exclusion of local contractors is based on a wrong perception for the development work that the government does. The fact of the matter is most of these companies are here because of the government. Including those grade one contractors, most of the work they have done is in the government projects; it was also the government which furnished them with loans and advance payments when working on these projects.And, we should not be misled into thinking that this practice is common in many countries; in Ethiopia the government has gone out of its way to support the construction sector. The other thing is the three requirements that we have mentioned earlier are really basic things: capacity to design and construct parks, having own foreign currency source and having own source of finance and will wait for the government’s advance payment to start its work. Now, with regard to Dire Dawa, it is the first park which was floated bid. The bid was canceled just before financial proposals were opened to be reviewed. Had the financial proposals been opened, it could have raised doubts about wanting to favor a certain party or not; but it was canceled before we had the chance to review the financial proposals. The basic reason for the cancelation was that we found certain provisions in the bid document that are inconsistent and conflicting. Some of these provisions were largely open to interpretation and they would have created confusion. In fact, we are just learning things as to how we should handle the bid process with regard to industrial park development. For example, the original bid document contained a provision that allows the participation of Joint Venture (JV) companies in the bid process. However, we did not specify whether the foreign company in the JV should be based in Ethiopia or elsewhere. This is important since the foreign company if based abroad it will require four to five months to mobilize equipment and personal; and we don’t have that kind of time. On the other hand, still with regard to JV companies there is a condition that needs to be fulfilled by each companies in JV with respect to their annual turnover. This has to be stated clearly. Ultimately, this confusion would have negative consequences on the outcome of the bid process. So, in a nutshell, what we did is strived for even more clarity and fairness. Companies that were part of the canceled bid could lodge a number of complaints, but it does not mean these complaints carry any weight. Beyond the Dire Dawa bid, the things that we have tried to clarify would help the coming bids for the construction of industrial parks in other towns. Yet, again we have invited these same companies to bid for the other parks. We have tried to follow the same approach that we have been following other government projects in the development of Bole- Lemi Park, which is using the project to build the local capacity in undertaking park developments. But, that approach did not serve us well especially when we have pressing timetables to make manufacturing work in Ethiopia.

But there are some who claim these added clarification should have been part of the technical specification of the original bid document in the first place. And that it raises legal and procedural issues on the procurement process that you are following?

One thing that had to be clear is that with regard to the park development we are conducting ourselves very carefully since we can’t afford to fail. If we fail, we have huge file of foreign debt that we need to settle which would be difficult to do without the parks and companies using these parks to earn foreign currency for the country. So, there is no legal or procedural doubt as we are trying to be highly transparent. If you take a bid process for road construction, the government has been doing it for many years and we know the ins and outs of floating a bid for such projects. However, our experience in the construction of industrial parks is almost next to nothing; hence we exercising extreme care while conducting ourselves. On the other hand, the end goal of building a park is not merely erecting the facility; it is rather having companies use it to develop our manufacturing base. So, if the final product is not good enough for companies will stand to lose billions of birr. On top of that, there are always clarifications and complaints from the participating companies. So this requires more clarification and refining of the bid document. For instance, we have received a complaint from one of the local companies (with JV arrangement) which could pass the technical evaluation stages. It requested explanation why it did not progress to the financial stages while other local firm (with JV arrangement) managed to go through to the financial phase. So, we had to consider the bid document carefully and make the said adjustments. Anyway, we have canceled the bid at technical stage and if these companies have the capacity to take part in the bid process, there is no harm done in revealing their technical strength and can always participate in the next bid. Nevertheless, had the financial proposal been opened, I could have understood the discomfort. Still, after the Dire Dawa bid, if there are other lessons to be learnt and things we need to incorporate, we would not hesitate to do so.

I understand that you are working to alleviate the longstanding forex problem in Ethiopia by promoting value addition and export orientation. But on the other hand, already invested manufacturing companies are facing severe shortage of forex to even satisfy their raw material import needs. Don’t you see some sort of a vicious circle there?

Yes, it is a fair description of the problem. It is no secret that Ethiopia faces a severe shortage of forex for years. Partly this is because of our growth; the massive expansion in the investment goods demand could not be matched with the growth our currency earning capacity. If you look at the growth of export in GTP I, it is very low; in the GTP II we plan to have around 30 percent growth in exports. This problem is highly complicated because our export sector is based on low-value agricultural sector and not value addition or manufacturing. If you ask me how this happened I would say that it is because we failed to remove the bottlenecks in the manufacturing sector and nurture export of value-added goods. Also, we have also failed to stir our agricultural export sector to a direction which is competitive in the global market in terms of price and quality. It will take time for our agriculture to be based on irrigation. And as you know, we are prone to frequent draught and that will detract from our agricultural export. So, the economy needs another leg to stand on to move out of this vicious circle. That is developing our manufacturing sector fast. When we expand our manufacturing base it has a two-fold effect on our forex earning capacity. For one, we will add value to our agricultural products there by boosting the price they fetch in the global market. On the other hand, our manufacturing will also help us substitute our import commodities saving a bulk of foreign currency. That is why we say manufacturing is a life and death matter for us at this particular moment. However, we should not take Ethiopia’s forex shortage to be a unique phenomenon; a number of countries while at their early stage s of development were highly tested by currency shortage. And, that is another reason why we could not afford to wait or take other priorities like nurturing local capacity in development of industrial parks. We have to have factories up and running as soon as possible; otherwise we will have hard time to leave the particular vicious circle you were referring to. One can’t leave this vicious circle by doing the same old thing that it has been doing for many years.

As we know, power is another bottleneck that the Ethiopian manufacturing sector is struggling with. Currently we see that consumers and manufacturers competing for the power and even the recently inaugurated the Addis Light Rail project is not safe from power cuts. What do you plan to do about that?

If we are to have manufacturing development we need to reduce the power problem to a level which is not a bottleneck for manufacturers. Globally, the profit margin for the manufacturing sector is quite thin. For instance, if a manufacturer could not produce for 5 days in one month, it means that they have lost 15 percent of their production time. They can’t be profitable in this condition since their production capacity is limited. This could also lead to manufacturers not meeting their order in time and being forced to sever their market relationship with their clients. I also know about manufacturers that were unable to meet their delivery timetable and have, due to power cuts, had to change their mode of transport from a shipment to air transport that is quite costly. So, power is a key factor for manufacturing. In our case, we should not only think about alleviating our power shortage problem but also should think about nurturing this sector as big industry. We can’t say we have done enough in this regard, but government recognizes it as big obstacle. However, we do have immense potential to develop this sector and we have to do more if we aspire to be top manufacturing country in Africa in the coming ten years.

As you have mentioned in your book, one of the issues with the Ethiopian industrial policy design in the past was the inability to offer incentives and follow the effectiveness of these policies by installing the appropriate sanction regimes. Why can’t the government implement this carrot and stick approach? Why do we wait for investors to fail or abuse the incentives instead of doing necessary follow-up?

Well it needs capacity to administer an incentive regime. You need an experienced bureaucracy to monitor the incentives given and how they are used for the intended purposes. There is delicate balance that could be kept. For instance, you say that you want to monitor your incentives strictly but there is a danger of stowing down from the work of a manufacturer when applying serious monitoring. So, it needs an experienced bureaucracy to monitor that. Others developed this over time; but we are still beginners in manufacturing and it will take time. But, even at this stages, the efforts are not that bad.