The first manufacturing industry in Ethiopia was established during the 1920s as a private household cottage enterprise. The first group of 27 factories, mostly owned by foreigners commenced operation by producing limited outputs.
The formal institutionalization effort of the manufacturing sector dates back to late 1950’s and early 1960’s when the imperial government developed a new policy to shore up the economy by attracting foreign investment to the economy.
The new policy brought about a series of incentives including tax exceptions, remittance of foreign exchange, duty free imports and exports, tax exemptions on dividends and financial support from the Ethiopian Investment Corporation and the Development Bank of Ethiopia.
Furthermore, the government introduced protective measures for industries by instituting high tariffs on and banning the importation of commodities that might adversely affect the market share of domestically produced goods. The products that had received such protection included sugar, textile, furniture and metal products. The government was also taking part in the sector by directly investing in industries that had high capital costs, such as the Assab Oil Refinery as well as the in paper and pulp, glass and bottle, tire, and cement industries.
In 1963, while the Second Five-Year plan was under way, the government enacted Proclamation No.1963/51 with the objective of consolidating other investment policies to expand benefits/incentives to Ethiopian investors (previous legislation had limited the benefits to foreigners only) and create an Investment Committee that would oversee investment programmes.
In 1966, the government also enacted Proclamation No.1966/242, which elevated the Investment Committee’s status from an advisory council to an authorized body empowered to make independent investment decisions. By early 1970s, Ethiopia’s industrialization policy included a range of fiscal incentives, direct government investment, and equity participation in private enterprises.
The government’s policy attracted considerable foreign investment. For instance, in 1971/72 the share of foreign capital in manufacturing industries amounted for 41 percent of the total paid-up capital. Many foreign enterprises operated as private limited companies, usually as a branch or subsidiary of multinational corporations. The Dutch had a major investment (close to 80 per cent) in the sugar industry. Italian and Japanese investors participated in textiles; and Greeks maintained an interest in shoes and beverages. Italian investors also worked in building, construction, and agricultural industries.
In 1975, the military government nationalized most industries and reorganized them into state-owned corporations. On February 7,1975, the government adopted a socialist economic policy. The policy identified three manufacturing sectors which are left to government prerogatives. These included basic industries that produced goods serving other industries as input and that had the capacity to create linkages in the economy; industries that produced essential goods for the general population; and industries that produced drugs, medicine, tobacco, and beverages.
The policy also classified industries for the public and private sectors. While the first industries were reserved for the state, the second industries were operated by state and private capital and the third were left to the private sector.
The 1975 nationalization had negative repercussions on the national economy as it blocked foreign private investment. Private direct investment, according to the National Bank of Ethiopia, declined from 65 million birr in 1974 to 12 million in 1977.
In 1983, the Derg regime issued Proclamation No. 235 (the Joint Venture Proclamation) signaled Ethiopia’s renewed interest in attracting foreign capital. The proclamation offered incentives such as a five-year period of income tax relief for new projects, import and export duty relief, tariff protection, and repatriation of profits and capital. It limited foreign holdings to a maximum of 49 per cent and the duration of any joint venture to twenty-five years. Although the proclamation protected investors’ interests from expropriation, the government reserved the right to purchase all shares in a joint venture.
The proclamation failed to attract foreign investment primarily because of investors’ mistrust of the government which was engaged in large scale nationalization. In 1989, the government issued Special Decree No. 11, a revision of the 1983 proclamation. The decree allowed huge foreign ownership in many sectors, except in those related to public utilities, banking and finance, trade, transportation, and communications. The decree also removed all restrictions on profit repatriation and attempted to provide more extensive legal protection to investors than provided in 1983 proclamation.
In March 1990 the government issued a mixed economy policy. Under the new system, the private sector would be able to participate in all parts of the economy with no limit on capital investment (Ethiopia had a 250,000 USD ceiling on private investment); developers would be allowed to build houses, apartments, and office buildings for rent or sale; and commercial enterprises were allowed to develop industries, hotels, and a range of other enterprises on government-owned land to be leased on a concessionary basis.
However, the Derg has never fully implemented the policy. The downfall of the regime in 1991 ushered a new era not only in the political development of the country but the entire socio-economic system. With the introduction of a major shift in the economic policy of the nation during the Transitional Government, a new development strategy of Agricultural Led Industrialization (ADLI) was instituted. ADLI envisaged agriculture development playing a leading role in the industrialization process by preparing various conditions for full-fledged industrialization.
The industrial development policy underscored the importance of the linkage between agriculture and industry through the development of agro-industry to bridge a smooth transition to full-fledged development of the industry. The strategy focused on export oriented sectors as priority sub-sectors to improve foreign exchange earnings.
The industry policy outlined the importance of labor intensive production as a major tool for generating employment opportunities. A number of concrete interventions including the maintenance of macroeconomic stability, building a regulated and functional financial sector, creating efficient civil service based on skilled and effective human resources and legal framework, the promotion of modern infrastructural facilities including the construction of industrial parks were charted out as sub-strategies for promoting of industrialization.
A number of regulatory reforms such as revisions in business registration procedures, investment code and the modernization of the tax regime including value added tax were introduced.
In order to build the capacity of the manufacturing sector, due emphasis was given to textile and leather industries for which various supportive institutions were formed. Moreover, food, beverages, apparel constituted major export oriented manufacturing sectors.
The manufacturing sector in Ethiopia is facing several challenges which require urgent and gradual solutions. Lack of skilled manpower, adequate financial resources, affiance in the acquisition of land and power supply, absence of transparent tax administration, hurdles in trade logistics for manufactured goods, inefficiency of government bureaucracy and corruption are only few of the challenges that need to be addressed if the manufacturing sector should prevail in the competitive global market.
The Ethiopian government is already taking a number of remedial measures to create better investment climate engaging in wider range of training necessary manpower for the manufacturing industries through Technical and Vocational Education Training Programmes and through university-industry linkage to encourage apprenticeship programmes for young engineers. Accomplishments in the construction of industrial parks and simplification of business regulations via the introduction of a single window service is paying off by luring investors into the manufacturing industry.
Ethiopia is endowed with natural resources that can effectively buttress the raw material needs of the manufacturing industries. The development of national power grid is in the making while infrastructural networks are in progress, creating favorable ground for the development of manufacturing industries. New breed of cotton is being introduced in the country while hides and skins are abundantly available given proper handing. Over the last several months, the reduction in global oil prices has brought about better opportunities.
All told, the development of industries in Ethiopia which has a 14 per cent share of the economy is still at the take off stage. A lot more improvements are required in the supply of power, better tax administration system, and financial support to investors. It is also essential to form joint ventures with foreign investors in addition to encouraging local businesspersons to invest in manufacturing industries. It is also vital to make sure that the sector is free of corruption.
[www.ethpress.gov.et/herald/]