Ethiopia’s approach to industrialisation is reminiscent of Chinese industrial growth policies of the early 1990s.
By Albab Seifu | August 23, 2016
Examining growth through urbanisation patterns
A World Bank brief released in 2015 featured a sobering statistic: The share of Africans living in urban areas in 2030 is projected to grow to 50%, up from 36% in 2010. Despite diverse urbanisation and economic growth patterns across the continent over the past decade, unprecedented economic growth has been closely tied to rapid urbanisation rather than rural industrialisation. A comparative look at north-east Asian industrialisation experiences provides valuable insights that underscore the importance of a cohesive urban and rural industrialisation strategy to stimulate equitable growth across geographies.
Domestic investments and consumption patterns were key drivers of industrialisation in East Asian economies. A more thorough understanding of the drivers of fast and slow development cycles in the early stages of this transformation can inform the design of African industrialisation strategies and improve the quality of development on the continent.
Ethiopia remains one of the least urbanised nations in the world: A mere 19% of its population lives in urban centres, well below the sub-Saharan average of 37%. But with an urbanisation rate of 3.8%, the country could face significant development challenges if this rapid urbanisation is not adequately handled.
Structural transformation: A slow shift from agriculture to industry
Ethiopia’s economy has performed exceptionally well over the past decade, with GDP growth averaging close to 11% annually, albeit, from a relatively low base. The agriculture, services, and industry sectors accounted for 41.4%, 43%, and 15.6% of real GDP in 2015, respectively. The economic transformation towards a more industry-oriented economy is well under way, with light manufacturing at the top of the agenda.
In comparison, in its early stages of industrialisation, China first focused on agricultural reform of small-scale, labour-intensive farming before moving to competitive export-oriented manufacturing. This shift in economic focus has been enshrined in Ethiopia’s five-year development blueprint covering 2015-20, known as the Growth and Transformation Plan II.
Contribution to GDP by Sector, 2014-15
Source: African Economic Outlook, 2016
Since its transition to a market-based economy in 1991, Ethiopia has successively drafted five-year economic development plans with a set of objectives and targets for each sector. Earlier blueprints emphasised industrialisation led by agricultural development, whereas more recent strategies have gradually shifted their focus to low technology and labour-intensive manufacturing in urban centres.
However, agriculture remains the dominant sector, representing 77% of employment and 84% of exports, and is primarily subsistence-based. The creation of a dynamic and broad-based domestic foundation that can withstand external shocks is critical to sustainable growth in Ethiopia.
Industrial clustering: A tool to accelerate industrialisation
An industrial cluster is defined as a “geographically contiguous concentration of related and supporting industries that are rendered more competitive because of synergies arising from participation in a value-adding supply chain”. Industrial clusters can contribute to growth when governments put in place infrastructure and policies conducive to their success. In Ethiopia, domestic and foreign investments in newly identified priority areas, such as leather and garments, have already begun flowing, with textile and shoe manufacturing industrial clusters starting to operate around the capital Addis Ababa.
This policy of industrial clustering in peri-urban areas addresses bottlenecks to structural transformation and promotes investments in infant industries through targeted incentives. However, the overwhelming majority of industries are concentrated in and around cities with developed infrastructure and support services. The expansion of agro-processing, innovation, and low-technology manufacturing parks is generally considered the most effective vehicle to increase earnings and employment.
Thus far, Ethiopia’s industrial parks have had limited influence on export earnings, quality employment generation, and technology transfer, but their contribution to the overall economy is yet to be fully assessed, with numerous industrial parks still under construction.
Ethiopia’s approach to industrialisation is reminiscent of Chinese industrial growth policies of the early 1990s, which leveraged special economic zones (SEZs) to bolster economic development. While a number of Northeast Asian countries have gradually implemented successful SEZs, African countries have produced mixed results. SEZs have transformed China’s urban landscape, and continue to contribute as much as 22% to its GDP, with the rural economy’s contribution remaining relatively low.
In Ethiopia, a well-integrated urban and rural industrialisation strategy that promotes the development of sustainable cities and rural industry can provide strategic direction for balanced economic growth.