Ethiopia Economic Update: A flourishing manufacturing industry will help more Ethiopians
The Ethiopian economy has continued a remarkable expansion with the gross domestic product (GDP) growing by an average 10.9% in the past decade, compared to a 5.4% average throughout Sub-Saharan Africa. Yet with 75% of jobs in labor-intensive agriculture, this growth is not reaching everyone.
Addressing the challenges to a flourishing manufacturing industry will expand benefits to more Ethiopians, and support the government’s plans to become a manufacturing powerhouse, according to the new Ethiopia Economic Update, Overcoming Constraints in Ethiopia’s Manufacturing Sector.
In addition to providing a short and a long-term view of the country’s economic growth, the report examines the challenges for building a strong, diversified manufacturing industry that will accelerate a structural transformation of the economy and provide benefits to many more Ethiopians.
“Ethiopia’s goal is to transform the country to an industrialized economy and increase the per capita income of its citizens to middle-income levels by 2025,” said Lars Christian Moller, lead economist and program leader. “Although great progress has been achieved the country must make changes to its burdensome tax, trade, and financing rules and improve basic services such as electricity to support local business and attract new investment.”
The update’s focus on addressing barriers to expanding the manufacturing sector and creating jobs comes amid challenges to diversifying the economy. Several constraints such as limited access to credit and land, and unreliable electricity make it difficult for entrepreneurs in Ethiopia to start new companies. The country’s complicated tax requirements and burdensome customs and trade-related regulations drive up costs for small and large companies alike and discourage foreign investors, according to the report.
“For Ethiopia, a country graduating through the early stages of economic development, industrial sector expansion is essential for sustained long-term growth and poverty reduction,” said Michael Geiger, World Bank senior country economist. “Improving education and training for men and women combined with job creation by expanding light industry can positively impact equity and spread benefits to many more Ethiopians, especially the poor.”
To support the Ethiopian Government in developing the manufacturing sector, preparing its men and women for manufacturing jobs and developing a business climate welcoming to new investors, the report includes seven policy recommendations for both small and medium size businesses and large investors:
Focus on skills development for men and women, which is vital for increasing firm productivity. A more literate and trainable labor force would not only increase productivity in Ethiopia, but also make the country more attractive to international firms seeking to invest in Africa.
Implement measures to improve access to finance for firms especially “the missing middle,” or small and medium sized enterprises. The majority of these companies are fully credit constrained.
Address constraints related to access to land and to electricity. By upgrading the grid network and reinforcing existing (and adding new) transmission and distribution lines will provide access to industrial areas as well as promote electricity exports.
Improve tax administration and advance the simplification of the tax system for micro, small and medium size enterprises. Managers in manufacturing firms spend a significant amount of time dealing with tax administration and a quarter of firms report tax administration as a major problem faced in their day-to-day operations.
Improve trade logistics, customs procedures and trade regulations, which primarily impacts large exporting firms and Foreign Direct Investment.
Simplify business related regulations and processes to facilitate the smooth entry and exit of firms that will support a dynamic and thriving business sector.
Use a strategic and phased approach for industrial park development that is in line with international experience. The government is supporting industrial parks for light manufacturers such as textiles and agro-processing and is emulating the path of the East Asian countries that have successfully managed to use industrial parks as a platform to catalyze investments.