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Investing in Capabilities in Readiness forIndustrialization:The Ethiopian Case

Seid Nuru [email protected]

Ethiopian Economics AssociationEthiopian Economic Policy Research Institute

New Industrial Policy in Africa: How to Overcome theExtractive Trap

03-04 November 2015Antananarivo, Madagascar

Seid Nuru [email protected] Investing in Capabilities in Readiness for Industrialization:The Ethiopian Case

Where Ethiopia Stands NowHow Did It Get There?Challenges During GTP I and the Road Ahead: GTP II

Outline




Income

PCI in 2011 PPP$: 724 in 2005; 1,218 in 2013.



Growth



Poverty



Other Social Indicators

Primary school GER: 26.2 in 1995 ⇒ 95.3 in 2013

Secondary school GER: 6.6 in 1995 ⇒38.4 in 2013

Undergraduate enrollment: 29,811 in 1995 ⇒ 585,152 in 2013

U5MR: 172 in 2001 ⇒ 68 in 2012

Longevity: 43-46 yrs in early 1990s ⇒ 62 yrs in 2013



Key Lessons

The kind of staggering problems Ethiopia had in early 1990srequired more than a ’conventional’ role of government.

The lessons for the incumbent government were:.

1 Stability and security was primary to long-term growth

2 The role of government need to be beyond stabilization-long termcapacity

3 Inclusiveness was critical

4 Social mobilization was important

5 Pragmatism without compromising core interests would help

6 Maximizing effective use of resources is key to get out of poverty

7 Political will including party discipline is important



Key Lessons

Ethiopia primarily followed a two-pronged approach to itsdevelopment efforts.

1 Investing heavily in long-term capabilities2 Ensuring inclusiveness

In 1995, agriculture-Led Development Industrialization (ADLI)strategy was introduced.



Which Sector to Target Most?



Which Sectors to Target Most

An important sector that was believed to have a maximum’multiplier’ effect and is common to both objectives oflong-term accumulation and inclusiveness was education.

Agriculture got emphasis due to its large share to the GDPand labor force.

In general, public investments in physical infrastructure,education and health, as well engagements in productivityenhancing measures were meant to ensure foster long-termcapabilities and transformation.

Interventions in ensuring equal access of the population toeducation, health, clean water, rural electrification program,agricultural extension services, and rural road networks weretargeted to benefit the rural poor.



The Outcomes until 2005

The outcomes until 2005 were not so great.

The 14 years period prior to 2005 was characterized by anerratic and less robust economic growth averaging to 4.9percent.

This growth rate was not robust enough to slash povertydown.

In fact, agriculture which was supposed to lead the economywas lagging 0.6 percentage points behind the rate of growthof population.

The demand-side particularly the urban sector was neglected(the direct head-on approach on the agriculture was nothelpful in the short-run)



Pragmatism in Practice: PASDEP

The Plan for Accelerated and Sustained Development to EndPoverty (PASDEP) was launched in 2005 and primarilyfocused on registering high economic growth and urbandevelopment.

The outcome was encouraging: GDP grew at an average rateof 10.5 percent.

Poverty was slashed down significantly.

Two reasons for the high growth:1 Early investments in long-term capabilities and inclusiveness

started to pay off: schools, health outcomes, etc.2 The immediate intervention in the urban centers created job

and hence income, and demand for the agriculture sector

The economy tend to be more resilient-more capable.



Pragmatism in Practice: PASDEP



Policy Making is an Iterative Process: The GTP

Two major legacies of PASDEP are high economic growth andhigh hope.

The high growth was somehow shrouded in the dust ofinflation: demand driven, service led growth.

The private sector mainly engaged in the service andconstruction sectors-local trade and renting activities.

Accounting of the economic performance by the end of thePASDEP period led to the diagnoses of elements of themomentum that cannot be sustainable.



Back to Theory on Structural Transformation

Key signs of structural transformation are:

.

1 A rise in per capita income

2 A rise in rate of capital accumulation

3 Changes in sector composition of activities.

Institutional transformation is both an outcome and means offacilitating structural transformation.

A state can play a role in the process of structuraltransformation (what kind of role??)



Back to Theory on Transformation



Stylized Facts on Structural Transformation




Major focus areas include:1 Diversification in the type and quality of capital-transformation

is all about type, level, and quality of capital!2 Direct involvement by the government in key strategic

industrial sectors3 New ventures of infrastructure4 Financial capability5 Consolidating efforts on education: more universities, priority

to science and engineering, TVET, quality



GTP: Expected Outcomes

A target of 11 percent annual growth of GDP (and anambition of becoming a middle income country by 2020).

A further reduction in poverty (from 29.6 to 22 percent)

A 100 percent primary level enrollment ratio

A 100 percent health care coverage, ......



GTP: Major Investment Targets

Sector Millions of Birr Share in percent

Industry 193,561 34Sugar 75,575 12.9Chemical, pharm., Cement 34,593 6.1Metal eng. ind. 20,466 3.6Textile 15,945 2.8Fertilizer ind. 13,205 2.3

Energy 177,735 31.2Transport 161,704 28.4

Railway 110,796 19.5Telecommunication 21,670 3.8Total 569,630 100



Targets Need to Be Exiting to Mobilize Efforts

.

The Great Renaissance Dam on the Nile River (6,000 MWhupon completion)




.

Mass transport system: Rail ways-The Addis Ababa LightTrain and the national Railway Network




.

The construction boom




.

Self sufficiency in financing major projects of national pride1 The Great Renaissance Dam Bond2 The urban housing saving scheme3 Telethon for the Great Dam4 Tombola and other lottery games for the dam

The result: gross domestic saving increased from 5.5 percentin 2010 to 22 percent in 2014; rate of gross capital formationreached 40.3 percent in 2014 up from 27.5 percent in 2010.



GTP: Promises need to be delivered



Structural Dynamics:Trends in the Structure of theEconomy



Structural Dynamics:Dynamic Contribution of Sectors



Structural Dynamics: Change in the Structure of the LaborForce



Growth: The Leading Sectors



Growth: Industry



Structural Dynamics:Dynamic Contribution of Sub sectors



Structural Dynamics:The Demand Side



Structural Dynamics:How Near is Ethiopia to StructuralTransformation?



Status of Structural Transformation: Learning from Others

.



Tasks for GTP II

.

The private sector need to work towards taking over the lead:From government-led demand-driven growth to private sectorled knowledge (technology) driven sustainable growth

For sustainability, quality matters- quality in education, labormarket reform, rewarding excellence

A modern economy requires competent institutions and anefficient civil service.

Corruption which is the worst form of exclusion with thepower to derail development endeavors need to be tackled.

Transformation requires moving from items of lowproductivity to brands of high productivity- this requiressuccessfully selling in the international market.



’GTP II’s Assessment of GTP I

(The GTP II document is a draft; only preliminary commentscan be made.)

The performance of GTP I is critically assessed in the GTP IIdocument.

Key issues of concern identified are:1 Low level of structural change2 Low rate of participation of the private sector in the

manufacturing industry3 Issue of good governance



Major Departure

Major departure of the GTP II is the emphasis given to:1 The manufacturing sector2 Efficiency, productivity, quality, and competitiveness in the

manufacturing and agriculture sectors3 Macroeconomic imbalances (demand-supply, resource balance,

current account balance)4 Overall (institutional) capacity in the construction sector5 Urban development (urban administration and governance to

foster industrialization)6 Private sector ’transformation’7 Harnessing human capital with technology (quality)8 Climate resilient green economy



Objectives

1 An average economic growth of 11 percent2 Deepen structural change by increasing engineering and

fabrication capacity, productivity, quality, and competitiveness3 Ensure the organized participation, ownership, and

inclusiveness of the people in the development process4 Build developmental political economy through democratic

developmental state



Directions

Nine important directions are identified among which1 ensuring democratic and developmental good governance, and2 deepening the capacity, participation, and inclusiveness of

women and the youth

are parts.



Macroeconomic Goals

1 An average economic growth of 11 percent at base casescenario and 12.2 percent growth at high growth scenario

2 Structural change3 Macroeconomic stability (single digit rate of inflation; stable

and competitive foreign exchange rate)4 A 29.6 percent rate of gross domestic saving by 2019/20.



Expected Structure of the Economy



Dynamic Contribution of Sectors to Growth



Expected Change in Export Structure



On the manufacturing ...

Modalities of intervention in the manufacturing sector include:

1 Identifying priority and strategic sectors-light manufacturing,agro-processing industries, metallurgy ...

2 Strengthening public-private partnership3 Inculcating the Kaizen principles in the sector4 Expanding and establishing industrial parks5 Nurturing micro and small enterprises6 Establishing training institutes for major industries7 Keep balance with smallholder and commercial agriculture to

ensure agriculture-manufacturing linkages



Globalized Services: The New Grand Project after GERD

.

A new international airport in the vicinity of Addis Ababa



.

Thank You!!


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