Cheap Labor: Why Ethiopia May Become The African Industrial Powerhouse


From The Conversation. Article by Ha-Joon Chang, Jostein Løhr Hauge and Muhammad Irfan for the U.N. Economic Commission for Africa report from Transformative Industrial Policy for Africa.

Except for Rwanda, Ethiopia is the only African country whose economic growth has been consistently high for more than a decade without relying on a natural resource boom.

Between 2004 and 2014, per capita growth in Ethiopia was 8 percent per year. This was the highest on the continent during this period, and is impressive by any standard.

The growth has been attributed mainly to a construction boom and increased agricultural productivity. But manufacturing has also been vital. It has grown at 11 percent per year and manufacturing exports increased more than tenfold. This was largely thanks to the increasing export earnings of the footwear and apparel industries. The growth represents more than a doubling of manufactured exports’ share in total merchandise exports, which itself more than quintupled during the period.

Nevertheless, manufacturing as a share of gross domestic product in Ethiopia remains 5 percent, well below the African average of 10 percent. The country also scores below the African average on diversification, export competitiveness, productivity and technological upgrading.

Despite this, it’s not a long shot to predict that Ethiopia will catch up with countries like China and Vietnam in some low-tech manufacturing industries in the near future. These are industries for which labor costs are very important. And right now you’d be hard pressed to find a country in the world that has cheaper labor than Ethiopia. Even beyond these obvious industries, there are reasons to believe that Ethiopia might be on the right track to catch up with more advanced economies.

In many ways the country’s developmental orientation resembles successful catch-up experiences in East Asia, such as Korea and Taiwan, with an authoritarian corporate structure and centralized economic planning.Africa's industrial powerhouse

Third largest cement producer in Africa

Ethiopia’s annual growth of cement production has been more than twice the world average. It’s is now the third largest cement producer in Africa.

The Ethiopian floriculture sector has made important contributions to overall economic development. The industry grew from a single firm in 2000 to about 100 in 2014.

The industry has also created indirect jobs through the expansion of horticulture. Related activities, such as packaging production, cold chain logistics and air transport have all benefited.

Foreign investment in floriculture

While Ethiopian firms initially kicked off the floriculture industry, foreign firms have increased their investment. In 2012 they accounted for 63 percent of all firms operating in the sector. This foreign investment has contributed to technological development and improved market access.

Foreign investors say Ethiopia has become an attractive investment location because of land and altitude, cheap labor and government incentives. These incentives include tax holidays on profits for up to five years, duty free privileges on all capital goods and the provision of construction material.

Subsidized loans have been the prime source of long-term investment financing for firms in the floriculture industry. Almost two thirds of firms in the industry have relied on loans from the Development Bank of Ethiopia. And private banks, seeing the success of these loans, have also started lending to the industry.

Future successes in Africa’s industrial powerhouse

Leather, textile and apparel have been designated top priority manufacturing industries. They have strong links with agriculture as they use livestock and cotton. They are also both labor intensive, absorbing labor from the agricultural sector, and have major export potential and low entry barriers.

To become internationally competitive, the Ethiopian government has invited foreign investors to provide much-needed investment capital and technological capabilities. A slew of incentives has been created to induce these firms – as well as domestic ones that can meet international standards – to export. These include:

  • Subsidized land rent in industrial zones.
  • Generous credit schemes.
  • 100 percent exemption from duties on imported capital goods and raw materials for export production.
  • Five-year tax holidays on profits.

Considering all the positive signs, Ethiopia might be on its way to becoming Africa’s industrial powerhouse.

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