Tipping The Balance In Favor Of Manufacturing

It is quite fascinating to observe how an innocuous occurrence once perceived as simple and harmless can set off a reliable effect resulting in a major turn of event.

To appreciate it, consider the ill-fated price cap directive and some of the major shifts in the Ethiopian economy since 2011, particularly the relationship between the government and private sector (mostly those in trade and services). A case in point is the statements made last week by the minister of industry, Ahmed Abtew. Ahmed, while evaluating the performance of the manufacturing sector since the commissioning of the Growth and Transformation Plan, stressed the need to channel resources (both financial and human) in the trade and services sector to foster industrialization. It is not in the best interest of the nation to keep its vital resources exclusively in trade and services sector, he told journalists. And how the government would go about this is what is of interest to the private sector members. The approach, he explained, was two-pronged. The first was to bring about a considerable reduction in the profit margin of trading and service business while the other was to install a sense of urgency to get the manufacturing sector off the ground and claiming Ethiopian ownership of the industrialization process. “We need to build consensus on the national growth agenda and the importance of giving high priority to manufacturing,” Ahmed said. Here, however remote, the link between the price cap days and the recent government decision to actually go head and de-incentivize the sector is apparent.

Regardless, it appears that what the minister has hinted was something a little more than a plan or an intention. In the past, specially during the price cap days, ultimatums like these were quite prevalent. The authorities including the late prime minister himself, warned business community members, particularly those in retail and wholesale venture, of an impending measure (or measures) that would wipe out the attractive profits margins enjoyed by the enterprises. In those days, a handful of options were placed on the table to induce “a more responsible business practice” that was said to be the cause for skyrocketing price levels. Finally, some of those plans seems to be rolling; but this time around there looks to be more pressing matters than stabilizing price levels. It is also about correcting mis-aligned resource allocation in the economy and particularly between the manufacturing and trading and services sectors. Now, it has become part of the industrial policy package.

Market-based allocation

Thus far, the role of the private sector in manufacturing industries has been minimal at best; and the question 'why?' has been taunting policymakers for a few years now. Furthermore, the reason behind the unprecedented expansion of the service economy instead of its manufacturing counterpart is also another quandary. The foremost explanation for the tilting balance in favor of the service and trading sector is also the most obvious one. It is the gap that exists between the return the two sectors offer to investors. It is quite clear that a rational businessperson would tend to go where profits are higher. In recent times, the domestic trading and services business is making many people wealthier than their wildest dreams. Accordingly, many more followed suit with more and more import companies and retail shops joining the business arena every day. This simply means that the service sector is winning the contest for resources in the economy; but most importantly the manufacturing sector is on the losing side of this contest.

As a matter of fact, development economists argue that getting the resource allocation right is the whole point of economics as a science. What is the right way of resource allocation and which system can bring such allocation is a topic that has attracted a lot of debate. While some argue for more freer market-based resource allocation, others advocate stronger government involvement in correcting faulty allocation perpetuated by the market forces. Well-documented development narratives of various parts of the world tells the story of different innovative ways by which leaders tried to direct resource to a specific sector that they deem vital for growth. Of course, only a few free-market enthusiasts relied on the market to do all the allocation in the economy.

In fact, this appears to be the gray-line separating the political economies of developmental state from neo-liberalism. At the same time, it is also the whole essence behind industrial policy. Industrial policy, according to the renowned political economist, Dani Rodrik, is any form of intervention by governments in a bid to correct allocative undesirables and stir economic development in the right direction. Developmental state practitioners in Ethiopia have made it abundantly clear that they are not happy with the current resource allocation across sectors, more specifically, the share of service sector and its attractiveness to the private sector at the expense of the production sectors such as manufacturing and agriculture.

A middle-aged man who is actively participating in the transportation and logistic services sector argues in favor of market allocation and the outcome high concentration of private sector in domestic trading and services. He says, private sector members should be held accountable for responding to the signals of market and invest in the most profitable venture at a given. On condition of anonymity, he further says, “Nothing more can be expected from a rational businessperson, but to respond to what the market has shown to be profitable.” He feels that the authorities are not being fair to the private sector. “I am simply a businessman. It is up to the authorities to correct the balance. If the return is attractive, there is absolutely no reason to avoid the manufacturing sector,” he argues forcefully.

As far as why the returns in the trading and services sector are mouth-wateringly good in Ethiopia, there are also a wide range of explanations. For some, that is just the modus operandi of economies at their take-off stage. This type of explanation underscores an emerging consumer society and budding consumption culture to be the main factor behind higher return to service sectors.

Ethiopian authorities seems to have a slightly different idea as to why the return is higher there and why it is the favorite business venture in Ethiopia. The late PM called it a jungle on many occasions, a jungle where the illicit financial transactions can thrive without attracting too much attention. The anonymous businessman did not appreciate such sentiments. He says the blame should rest on the authorities since it is up to them to close the legal and administrative loopholes. “Business (entrepreneurial ability) in its basic sense is finding those lawful yet unseen opportunities and exploiting them for profits,” he argued further. Towards this end, the government has already started to introduce various reforms such as tax system reforms and new trade competition law. However, all were not that serious compared to the recent move to establish a retail business giant with Walmart Inc. taking over the management system. With Walmart's store management experience and one billion birr initial capital that the state put into the company the domestic trading sector could be in for a competition of their lifetime. Ahmed clearly stated it is the profit margin that the government is after.

More than incentives

It appears sector players see the challenge facing the manufacturing sector is not just the service sector offering a competitive return to potential investors. In fact, many doubt if they would be motivated to move to the manufacturing sector if the return was in favor of the latter. The manufacturing sector in itself has many various gaps at the moment, according to commentators. Among these were the technological and human resources prerequisites of manufacturing. Most of private sector players in the services sector hardly possess the knowhow to overcome challenges of building a manufacturing firm from the ground up. Ahmed, on his part, says the labor-intensive industries that the country is promoting at this times is the perfect place to learn and nurture the potential future high-tech industrialists. A handful of service sector players that The Reporter talked to has no ideas as to where they would start to be future manufactures except the option of buying one of the privatized manufacturers from the government. To some extent, it is quite astonishing to observe the trends, even in larger conglomerates, that privatization is becoming a better option for the private sector players than building factors from the ground-up.

By its nature manufacturing is a longterm investment which requires commitment and also entails greater risk, the anonymous businessman explains. “One other issue that makes domestic trading and service more attractive is this very risk factor,” he said. The response of investors that The Reporter talked to clearly shows such risk in Ethiopian manufacturing sector comes from various directions. First and foremost it appears that trust between the private sector players and the government has been and still is wearing thin. There are various reasons for this. Most seems to have discomfort with policy predictability and the sustainability of systems that are put in place. The anonymous businessman agrees with this. He says with long-term investment commitment like manufacturing, predictability and sustainability is most important issue.

More importantly, some policy mistakes committed by authorities in the past also appear to have contributed much to the mistrust. The question of economic leadership and capability of decision-makers at the helm of the sectors is also another matter, he explains. “The business community has no one to take the responsibility for loss incurred as a result of faulty policy decisions,” he argued further. This, according to his argument, raises the risk level. Marcelo Giugale (Ph.D.), the World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa, says industrial police is becoming more of coordination and information sharing. He compares the industrial polices of the 50s and 60s which generally followed interventions that are top-down in nature. The government was the one that make strategic choices and decides on the area of intervention and that has resulted in document miserable failures across the globe. Ahmed hinted, in his press conference, that the approach his government is keen to follow is that of dialogue. “We hope to build consensus on the national growth agenda. And the process of consultation would be regular; at once every month,” he explained. Giugale's idea of new trends industrial policy seems to be in line with Ahmed's plans for the remaining two years on the GTP.

Nevertheless, both the sector players and pundits agree on the need to have close consultation. And that consultation cannot be a substituted by any amount of incentive or promise of return to investors. Even under the most favorable conditions, if the trust is not there to consult and act in line with the common understanding, it appears investors prefer to keep their money where long-term investment is not required and risk is relatively smaller.
Source: The Reporter