Transforming Ethiopia into a Manufacturing Powerhouse

ADDIS ABABA, July 8, 2015 – Ethiopia continued to see double digit growth in 2014, but 90 percent of GDP is driven by agriculture and other services. The country also faces several constraints slowing down its transformation into an industrialized economy. The importance of developing a skilled labor force and improving the investment climate are among the key areas that will help support the Government of Ethiopia’s plan of becoming a manufacturing powerhouse and increasing incomes by 2025, according to the World Bank’s latest Ethiopia Economic Update report.

Productivity gains are a key factor in determining long-term economic growth and improving living standards. “Ethiopia needs to improve how well firms are managed and how products and services are delivered,” said Lars Christian Moller Lead Economist and Program Leader. “There also needs to be improvements in how well the overall economy is able to reassign resources from lagging firms to more dynamic ones.”

Ethiopia has not made significant progress in pulling labor out of agriculture into more productive and industrial jobs with three-quarters of all workers still employed in agriculture. For a country graduating through the early stages of economic development, growth in the industrial sector is essential for sustained long-term growth and poverty reduction. The structural economic transformation that involves the reallocation of workers from the poorly productive agriculture to more productive economic activities in manufacturing is an important step towards the creation of better-paying jobs.

In its effort to accelerate manufacturing growth, Ethiopia is implementing an ambitious Industrial Park program. Using this approach, the strategy hinges on attracting Foreign Direct Investment (FDI) in the export-led and labor-intensive manufacturing sector. The imperative is to build on the country’s agricultural foundations by moving toward new tradable activities in manufacturing that absorb large numbers of young and semi-skilled workers.

Several challenges need to be addressed in order for Ethiopia to accelerate its structural transformation and significantly expand light manufacturing, which is vital for sustaining economic growth and development.  “Ethiopia’s skills gap and constraints related to access to land, infrastructure, trade logistics, and customs regulations in private investment have hindered the acceleration to structural transformation, unlike in East Asia, where foreign direct investment was able to capitalize on a large pool of trainable labor, enabling investors to improve productivity while benefitting from low production costs,” said Michael Geiger,Senior Country Economist.  

The report provides the following policy recommendations which could contribute to the development of the manufacturing in Ethiopia:

1. Increase productivity through skills development.
2. Improve access to finance for firms especially for SMEs
3. Address binding constraints including access to land and electricity.
4. Improve tax administration and simplify the tax system.
5. Improve trade logistics, customs procedures and trade regulations, to promote export and FDI.
6. Simplify business entry regulations and processes to promote a dynamic and thriving business sector.
7. Use a strategic and phased approach to develop Industrial Parks based on best international practices.