Ethiopia Industrial Policies Part 1: Value of Import-Substituting Industrial Policies
Ethiopia is one of the few countries in Africa that pursues an active and comprehensive industrial policy. Ethiopia is looking to position itself as the new low-cost manufacturer of the world. To achieve its goal, Ethiopia needs proper industrial policies consideration which comprise “more particular facts than any brain could ascertain or manipulate” (Hayek 1973). The objective of the “Industrial Policies Series” is to examine current outcomes of Ethiopia’s endeavor to identify key elements in the Ethiopia-specific complexity that are pivotal to both success and failure. Targeted sectors used for our examinations are the leather sector, horticulture sector, and cement sector. In part A, a comparison between the leather, horticulture sector and the cement sector will be made to stress on the value of import-substituting policies.
The broad consensus about trade policies for economic development in the 50’s and 60’s points out that the basis of industrial policies is import substitution (Kruger 1997). Nevertheless, what is widely accepted today as the correct path for developing countries is the export-oriented trade regime (Kruger 1997). General argument has been made that the import substitution path has outlived its usefulness (Kruger 1997). The prevailing Washington Consensus is also based on such ground and is regarded as a modern rule of thumb.
Putting aside the academic debate for a moment, the motivation of the three sectors in Ethiopia are not identical, leading to discrepancies in industrial policies. The development of the cement sector is following an import-substitution path while the leather and horticulture sectors stem from an export-oriented rationale. Consequently, a policy tool that is used exclusively for the cement sector is “import ban” (Oqubay 2019). It is nowhere to be found in the leather and horticulture sector. It’s one and only manifesting purpose is to build up a protective wall that rejects mature foreign cement companies from entering the Ethiopian market.
Beyond favoring much more of the selected industry, “import ban”, along with other protective policies, defies existing comparative advantage (Amsden 1992, 2004; Lin and Chang 2009). Arguably, it protected the domestic cement industry and has largely increased the state’s cement production capacity. This boom then plays a strategic and crucial role in housing developments, infrastructure programs, and urbanization of Ethiopia (Oqubay 2019). All these three beneficiaries are, by themselves, important channels for positive externality to reach a broader scope.
Ethiopia has long been one of the least urbanized countries in Africa (Gelb 2020). Less developed urban properties left farmers with little choice but to stick with rural properties for social securities and stability (Gebreselassie 2006). This inhibits labor migration to industrial activities, and private investment in complementary assets (Gelb 2020). When housing and infrastructures are put in place, cities are prepared to absorb labor which will substantially boost production and accumulation of capital goods. Moreover, the cement industry induces positive linkage to packaging, transportation, building materials and other areas. Both industrial development and dynamic linkage will route back to invigorate the cement industry as construction in general has been sparked (Oqubay 2019).
According to a 2016 report, domestic cement firms take up to 55% of Ethiopia's total capacity (CSA 2016). In contrast, the other African countries are dominated by the “big five” multinational companies (CSA 2016). This means that holding down input costs and adjusting supply as needed become achievable for Ethiopia but not for the other countries that have not implemented import-substituting policy in the cement sector.
On the contrary, export-oriented strategies will not directly enhance control over production factors, nor will it create a virtuous cycle in similar fashion. The capital good, produced by an export-oriented sector, is usually not a productive input for industrial development of other sectors. In other words, what the leather and horticulture sector produce, namely leather goods and plants , will not be directly put into production of other kinds. Part of the reason is, in a dualism structure, richer countries and poorer countries, such as Ethiopia, have their own structural features (Mail and Guardian 2013). Ethiopia's comparative advantage is clearly not in the capital-intensive fields. Though, admittedly, monetary forms of capital can flow freely but material output of labor-dominated activities are less useful for industrialization in general.
This is certainly not to say that export-oriented strategy is inferior to import-substituting one. Export is the main source of foreign exchange, specialization, and technology transformation in developing countries (Lall, 2000). Also, income implied by a country’s export is found to have a strongly positive relationship to a country’s level of income (Hausmann, Hwang, Rodrick 2005). The opportunity of learning from the global market is especially helpful for industrial growth in developing countries. For example, the horticulture sector in Ethiopia has attracted many foreign investors, bringing in different technologies and management expertise for the whole supply chain. Airfreight, phytosanitary, and cold-chain practices have been dramatically improved thanks to foreign involvement (Oqubay 2019).
Though export-oriented industrial policies are dominating academic debate and have seen success in multiple areas, the value of import-substituting ones should be well-recognized for their practical contribution to domestic control over essential inputs, which is extremely helpful to a developing economy like Ethiopia. Unlike ambitious export-oriented strategies, import-substituting ones are down-to-earth. They directly respond to fundamental needs in a marching economy, consolidating a nation-wide foundation that will be beneficial to virtually all other developmental paths.
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